Simple Interest

An Interest is the amount paid by someone who borrows a certain amount of money. This
term is commonly used in banks, loans, installments and investments. It is associated with
percent, rate and the length of time, for which the amount of money is borrowed.
There are many types of interest that can be applied. Simple interest is the simplest and
most common type of interest. This type of interest is applicable for a short-term duration,
usually in days, weeks, months or even a few years with not so large amounts of money.
Borrower - the person who is receiving the amount and will be paying back the
same amount with the interest on the required date or time period.
Lender - the person who is giving the amount which has to be paid on the
required date or time period.
Loan - temporary borrowing of money which is to be paid after a certain
period of time.
Percent - one part in a hundred.
Ex. 10%
 Factors of Simple Interest
There are only 3 common factors to be considered with
regards to simple interest.

1. Principal
This is the amount of money being borrowed. This could be loaned from a bank or any
loaning establishment or borrowed from a person. This will be the basis of how much will be
paid with the additional compensation for borrowing.
2. Rate of Interest
This is the percent to be used to calculate the additional amount to be paid along with the
principal. Common rates of interest ranges from 1 to 10% but it can also be higher
depending on the agreement between the parties.
3. Time
This is the period from the beginning when the money was borrowed to the period that
when the money should be returned with the additional amount (interest). This can also be
called a term or deadline. This should properly and strictly be observed especially in huge
amount of loans.
 Kinds of Simple Interest

There are basically two kinds of simple interest: ordinary and exact. These two terms uses
the same formula for solving the simple interest but they differ on using the time.
Ordinary simple interest is a simple interest that uses 360 days as the equivalent number
of days in a year. On the other hand, Exact simple interest is a simple interest that uses
exact number of days in a year which is 365 (or 366 for leap year).
These two kinds of simple interest are only applicable if the unit of time used is in days.
 Calculating Simple Interest
Computation for simple interest is very easy and convenient to do since it only involves
direct multiplication of the parameters. Below is the formula for getting the simple interest.
Interest = Principal x Rate x Time

Note: beginning date is not included in counting.

Example
A man borrowed $2000 from his colleague to buy a new computer. He agreed to pay the amount with an
interest rate of 5% for 1 year. What is the amount of interest that the man will pay?
Principal amount is $2000.
Rate of interest is 5%.
Time to pay the principal with the interest is 1 year.
Using the formula for solving the interest;
Interest = Principal x Rate x Time
Interest = $2000 x 5% x 1
Interest = $2000 x 0.05 x 1
Interest = $100
Therefore, the man will pay $100 interest.