Simple Interest

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.

Table of Contents:

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 to calculate the total amount, the following formula is used:

Amount (A) = Principal (P) + Interest (I)

Where,

Amount (A) is the total money paid back at the end of the time period for which it was borrowed.

Click here to get the simple interest calculator for quick computations.

Simple Interest Formula For Months

The formula to calculate the simple interest on a yearly basis has been given above. Now, let us see the formula to calculate the interest for months. Suppose P be the principal amount, R be the rate of interest per annum and n be the time (in months), then the formula can be written as:

Simple Interest for n months = (P × n × R)/ (12 ×100)

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 the simple interest formula in maths.

Example 1:

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.

Solution:

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 = (10000 × 10 ×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

Example 2:

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.

Solution:

P = Rs 50,000

R = 3.5%

T = 3 years

 SI = (P × R ×T) / 100 = (50,000× 3.5 ×3) / 100 = Rs 5250 

Example 3:

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.

Solution:

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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Frequently Asked Questions on Simple Interest – FAQs

What is simple interest and example?

Simple Interest (S.I.) is the method of calculating the interest amount for a particular principal amount of money at some rate of interest. For example, when a person takes a loan of Rs. 5000, at a rate of 10 p.a. for two years, the person’s interest for two years will S.I. on the borrowed money.

What is simple interest and compound interest?

By definition, simple interest is the interest amount for a particular principal amount of money at some rate of interest. In contrast, compound interest is the interest calculated on the principal and the interest accumulated over the previous period.

What are the types of simple interest?

Simple interest can be considered as two categories when the time is considered in terms of days. They are ordinary and exact simple interests. Ordinary simple interest is a SI that takes only 360 days as the equivalent number of days in a year. On the other hand, Exact simple interest is a SI that takes exact days in 365 for a normal year or 366 for a leap year.

What are the 2 types of interest?

In our daily lives, the two types of interest we generally deal with are simple interest and compound interest.

How do I calculate S.I.?

To calculate the SI for a certain amount of money (P), rate of interest (R) and time (T), the formula is:
SI = (PTR)/100
Here,
SI = Simple interest
P = Principal (sum of money borrowed)
R = Rate of interest p.a
T = Time (in years)

Test your knowledge on Simple Interest

9 Comments

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