Simple Interest

Interest is nothing but a fee paid on some borrowed assets. When a man lends some money to someone else, the borrower pays a fee to the lender. This fee is known as 'interest'. 'Simple interest' is actually calculated only on the principal amount or on the portion of the principal amount which is unpaid. The amount of simple interest,thats is paid each year is a fixed percentage of the amount that is borrowed or lent at the start.When the money is paid back, the principal amount (amount of money that was borrowed) and the interest is paid back. The amount to interest actually depends on the interest rate, the amount of money borrowed (principal) and the length of time that the money is borrowed. When you deposit some money into a bank, you are essentially loaning it to the bank. Simple interest is the amount of money initially charged on a loan, and does not take into account the compounding of interest over the time.Simple interest is generally charged for borrowing the money for short periods of time. I like to share this What is Interest Rate with you all through my article.


Formula of Simple Interest


Simple Interest can be identified by a plain and simple math formula.The simple interest formula is as follows:

Simple Interest = Principal × Rate × Time

where:

'Simple Interest' is nothing but the total amount of interest paid,
'Principal' is the total amount lent or borrowed,
'Rate' is the percentage of the principal amount charged as interest each year. This is expressed as a decimal fraction, so percentage must be divided by 100. For example, if the rate is 10%, then use 10/100 or 0.10 in the formula.
'Time' is the time in years of the loan given.

Total repayment = ( Principal + Simple Interest )

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Example of Simple Interest


Question A: A student purchased a computer by obtaining a simple interest loan. The cost of the computer was $1500, and the interest rate on the loan was 12%. If the loan was to be paid back over 2 years, calculate:
1. The amount of interest paid over the 2 years,
2. The total amount was paid back,

Solution: Principal: P = $1500, Interest Rate: R = 12% = 0.12, Repayment Time: T = 2 years

Part 1: Simple Interest: I = PRT
= 1500 × 0.12 × 2
= $360

Part 2: Total repayments = Principal + Simple Interest
= $1500 + $360
= $1860



Question B: You borrow $10,000 for 60 days at 5% simple interest per year (assume  365 day year).

Solution:

Simple Interest, I =PRT= 10,000 * .05 * (60/365) =$ 82.1917


Importance of Simple Interest


Simple interest is sometimes used for very short-term loans. For example, the Simple Interest can be charged for a period of 30 days when the short-term loan is promised to be repaid. The repayment amount is the principal loan plus also the simple interest. Since the period of time is so much short, the interest is not compounded.