What is Simple Interest?

Simple interest is a quick and easy method to calculate interest on the

money, in the simple interest method interest always applies to the original
principal amount, with the same rate of interest for every time cycle. When we
invest our money in any bank, the bank provides us interest on our amount.
The interest applied by the banks is of many types one of them is simple
interest. Now, before going deeper into the concept of simple interest, let's
first understand what is the meaning of a loan.
A loan is an amount that a person borrows from a bank or a financial
authority to fulfill their needs. Loan examples include home loans, car loans,
education loans, and personal loans. A loan amount is required to be returned
by the person to the authorities on time with an extra amount, which is
usually the interest you pay on the loan.
Simple Interest Formula

Simple interest is calculated with the following formula: S.I. = P × R ×

T, where P = Principal, R = Rate of Interest in % per annum, and T = Time,
usually calculated as the number of years. The rate of interest is
in percentage r% and is to be written as r/100.
 Principal: The principal is the amount that initially borrowed from the bank or
invested. The principal is denoted by P.
 Rate: Rate is the rate of interest at which the principal amount is given to someone
for a certain time, the rate of interest can be 5%, 10%, or 13%, etc. The rate of
interest is denoted by R.
 Time: Time is the duration for which the principal amount is given to someone.
Time is denoted by T. Time: Time is the duration for which the principal amount is
given to someone. Time is denoted by T.
 Amount: When a person takes a loan from a bank, he/she has to return the principal
borrowed plus the interest amount, and this total returned is called Amount.
Amount = Principal + Simple Interest
A = P + S.I.
A = P + PRT
A = P(1 + RT)

Simple Interest Example:

Michael's father had borrowed $1,000 from the bank and the rate of interest
was 5%. What would the simple interest be if the amount is borrowed for 1
year? Similarly, calculate the simple interest if the amount is borrowed for 2
years, 3 years, and 10 years?
Solution:
Principal Amount = $1,000, Rate of Interest = 5% = 5/100. (Add a sentence
here describing the given information in the question.)
 Simple Interest

S.I = (1000 ×5 × 1)/100

1 Year S.I = (1000 ×5 × 1)/100 = 50

1 2 Year S.I = (1000 × 5 × 2)/100 = 100

Year
3 Year S.I = (1000 ×5 × 3)/100 = 150

10 Year S.I = (1000 × 5 × 10)/100 = 500

Now, we can also prepare a table for the above question adding the amount to be returned after
the given time period.

Simple Interest Amount

1 Year S.I = (1000 ×5 × 1)/100 = 50 A= 1000 + 50 = 1050

2 Year S.I = (1000 ×5 × 2)/100 = 100 A= 1000 + 100 = 1100

3 Year S.I = (1000 × 5 × 3)/100 = 150 A = 1000 + 150 = 1150

10 Year S.I = (1000 × 5 × 10)/100 = 500 A = 1000 + 500 = 1500

What Types of Loans use Simple Interest?

Most banks these days apply compound interest on loans because in this
way banks get more money as interest from their customers, but this method is
more complex and hard to explain to the customers. On the other hand,
calculations become easy when banks apply simple interest methods. Simple
interest is much useful when a customer wants a loan for a short period of
time, for example, 1 month, 2 months, or 6 months.
When someone goes for a short-term loan using simple interest, the interest
applies on a daily or weekly basis instead of a yearly basis. Consider that you
borrowed $10,000 on simple interest at a 10% interest rate per year, so this
10% a year rate divide into a rate per day which is equal to 10/365 = 0.027%.
So you have to pay $2.73 a day extra on $10,000.
Simple Interest vs Compound Interest

Simple interest and compound interest are two ways to calculate interest on a
loan amount. It is believed that compound interest is more difficult to calculate
than simple interest because of some basic differences in both. Let's understand
the difference between simple interest and compound interest through the table given below:

Simple Interest Compound Interest

Simple interest is calculated on the

Compound interest is calculated on the
original principal amount every
accumulated sum of principal and interest.
time.

It is calculated using the following It is calculated using the following formula:

formula: S.I.= P × R × T C.I.= P × (1+r)t - P

It is different for every span of the time period

It is equal for every year on a
as it is calculated on the amount and not
certain principal.
principal.

Simple Interest: Tips and Tricks

 To find the time period, the day on which money is borrowed is not taken into
account, but the day on which money has to be returned is counted.
 The rate of interest is the interest on every $100 for a fixed time period.
 Interest is always more in the case of compound interest as compared to simple
interest.
 The formula or methods to calculate compound interest is derived from simple
interest calculation methods.
 Rate of interest is always kept in fractions in the formula.

Think Tank:
 What if a bank provides you an interest such that your money doubles every day, if
you invested $1 on day 1, in how many days you will become a billionaire?
 Will you invest if a bank provides a negative rate of interest?