Simple Interest Calculation

Simple interest is commonly used in personal loans, savings accounts, fixed deposits, and other financial transactions that involve a fixed interest rate.

  Formula used:
  
  
        S.I. = (P × R × T)/100
       
         S.I.  = Simple Interest
           P   = Principal
           R   = Rate of Interest in % per annum
           T   = Time
 
 
Total amount you will have to repay:

Total Amount (A) = Principal (P) + Interest (S.I.)


Direct formula for calculating the total amount:

           A   = P(1 + RT)
        
           A   = Total amount you will repay by the end 
                 of the specified time period.
           P   = Principal
           R   = Rate of Interest in % per annum
           T   = Time

  
  
Formula used:
  

Calculate S.I. for a specific number of months:

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

In the real world, when you borrow money, it's important to remember that it comes with additional costs. The person or company that lends you the money, like a bank or finance company, expects you to repay more than the original amount.
This extra amount is determined by something called the interest rate, which can be calculated in different ways (simple interest or compound interest).
In this module, we'll focus on a simpler method called simple interest, while compound interest will be covered in the next module.

Now, let's move on to understanding how to calculate simple interest.

Simple interest is based on the original amount of the loan or the initial deposit in a savings account.

Now, let's talk about the key players in borrowing. The person or company that borrows the money is known as the borrower or debtor. They receive the funds and agree to pay back the borrowed amount, usually with some interest, within a specific timeframe.

On the other side, the person or company that gives the money to the borrower is called the lender or creditor. They trust the borrower with their funds and expect to be repaid according to the agreed-upon terms.

To sum it up, the borrower is the one who receives the money, and the lender is the one who provides it.

Simple interest leads to linear growth, as the interest amount remains constant over time.

Simple Interest rate Examples

Question 1:
John borrowed $2,000 from a bank at an annual simple interest rate of 5%. He paid back the loan amount with interest after 3 years. Calculate the total amount he repaid.

Solution:
Given:
Principal (P) = $2,000
Rate (R) = 5% = 0.05 (as a decimal)
Time (T) = 3 years
Simple Interest (SI) = P * R * T
SI = 2000 * 0.05 * 3 = $300
Total amount repaid = Principal + Simple Interest
Total amount repaid = $2,000 + $300 = $2,300
Therefore, John repaid a total of $2,300.

Question 2:
A sum of $5,000 was invested in a savings account at a simple interest rate of 4.5% per annum. How much interest will be earned after 2 years?

Solution:
Given:
Principal (P) = $5,000
Rate (R) = 4.5% = 0.045 (as a decimal)
Time (T) = 2 years
Simple Interest (SI) = P * R * T
SI = 5000 * 0.045 * 2 = $450
Therefore, the interest earned after 2 years will be $450.

Question 3:
A loan of $10,000 was taken from a bank at an annual simple interest rate of 8%. If the borrower repaid a total of $12,000 at the end of 3 years, what is the amount of interest paid?

Solution:
Given:
Principal (P) = $10,000
Total amount repaid = $12,000
Time (T) = 3 years
Total Interest Paid = Total amount repaid - Principal
Total Interest Paid = $12,000 - $10,000 = $2,000
Therefore, the amount of interest paid is $2,000.