Simple Interest is an easy method of calculating the interest for a loan/principal amount. Simple interest is a concept which is used in most of the sectors such as banking, finance, automobile, and so on. when you make a payment for a loan, first it goes to the monthly interest and the remaining goes towards the principal amount. In this article, let us discuss the definition, simple interest formula, and how to calculate the simple interest with examples.
What is Simple Interest?
Simple Interest (S.I) is the method of calculating the interest amount for some principal amount of money. Have you ever borrowed money from your siblings when your pocket money is exhausted? Or lent him maybe? What happens when you borrow money? You use that money for the purpose you had borrowed it in the first place. After that, you return the money whenever you get the next month’s pocket money from your parents. This is how borrowing and lending work at home.
But in the real world, money is not free to borrow. You often have to borrow money from banks in the form of a loan. During payback, apart from the loan amount, you pay some more money that depends on the loan amount as well as the time for which you borrow. This is called simple interest. This term finds extensive usage in banking.
Simple Interest Formula
The Formula for simple interest helps you find the interest amount if the principal amount, rate of interest and time periods are given.
Simple interest formula is given as:
SI = (P × R ×T) / 100
Where SI = simple interest
P = principal
R = interest rate (in percentage)
T = time duration (in years)
In order t0 calculate the total amount, the following formula is used:
Amount (A) = Principal (P) + Interest (I)
Amount (A) is the total money paid back at the end of the time period for which it was borrowed.
Difference Between Simple Interest and Compound Interest
There is another type of interest called compound interest. The major difference between simple and compound interest is that simple interest is based on the principal amount of a deposit or a loan whereas the compound interest is based on the principal amount and interest that accumulates in every period of time. Let’s see one simple example to understand the concept of simple interest.
Simple Interest Problems
Let us see some simple interest examples using simple interest formula in maths.
Rishav takes a loan of Rs 10000 from a bank for a period of 1 year. The rate of interest is 10% per annum. Find the interest and the amount he has to the pay at the end of a year.
Here, the loan sum = P = Rs 10000
Rate of interest per year = R = 10%
Time for which it is borrowed = T = 1 year
Thus, simple interest for a year, SI = (P × R ×T) / 100 = (1000× 100 ×1) / 100 = Rs 1000
Amount that Rishav has to pay to the bank at the end of the year = Principal + Interest = 10000 + 1000 = Rs 11,000
Namita borrowed Rs 50,000 for 3 years at the rate of 3.5% per annum. Find the interest accumulated at the end of 3 years.
P = Rs 50,000
R = 3.5%
T = 3 years
SI = (P × R ×T) / 100 = (50,000× 3.5 ×3) / 100 = Rs 5250
Mohit pays Rs 9000 as an amount on the sum of Rs 7000 that he had borrowed for 2 years. Find the rate of interest.
A = Rs 9000
P = Rs 7000
SI = A – P = 9000 – 7000 = Rs 2000
T = 2 years
R = ?
SI = (P × R ×T) / 100
R = (SI × 100) /(P× T)
R = (2000 × 100 /7000 × 2) =14.29 %
Thus, R = 14.29%
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