Once each of the three factors of simple interest has been identified, it is fairly simple to calculate simple interest. Let's look at an example.
Example: If P = $200, R = 4%, and T=2 years, find the amount of simple interest that must be paid.
In this example, we are given everything we need to know to calculate simple interest. We are told that the principal amount is $200. We are also told that the rate is 4%. Now all rates, when using the simple interest formula, must be changed into a decimal. Therefore, this 4% rate must be changed to 0.04. Last we are told that the amount of time is 2 years. Using the formula {eq}I=PRT {/eq}, we can calculate the simple interest as:
Simple Interest Example
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How to Find Rate in Simple Interest Formula
The simple interest formula can also be used to solve for the rate or the time. There are four parts to the simple interest formula: interest itself, principal, rate, and time. As long as three of the four items are known, then the formula can be used to solve any of the four pieces to the simple interest formula. Let's take an example of how to use the simple interest formula to calculate a rate.
Example: You borrow $450 dollars from your friend, and they would like you to pay it back with an additional $45 in 6 months. What interest rate is your friend charging you to borrow the $450?
We begin this problem by first identifying each of the three pieces of the simple interest formula that is needed to properly use the simple interest formula. At the beginning of the example, it says that "you borrowed $450". Since this is the starting amount of money, then $450 is the principal. Next, the problem says your friend would like you to "pay back an additional $45". This amount of money is how much your friend is charging you for borrowing the principal amount of money. Therefore, the interest is $45. Lastly, the problem says that your friend would like you to return the full amount and interest "in 6 months". Since this is the length of time that you will have to borrow the money and pay it back with interest, then time is going to be 6 months, but divided by 12. Remember that all time must be converted into one full year. So we cannot use 6 as the time, because that would indicate 6 years. We use 6 divided by 12 because that indicated half a year, which is equivalent to 6 months.
Now we can plug the information that we know into the simple interest formula and solve for the rate.
Calculating Rate Example
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Future of Maturity Formula
When a bank lends money, they expect the borrower to pay back the original or principal amount of the loan, as well as the interest that they charged to borrow the money. The total amount of money that has to be paid back (the original amount plus the interest) is called the Future Value. Another name for future value is the maturity value. Just like simple interest, future value also has a formula that can be used to calculate its value. Future value, denoted by the letter A, is equal to the principal value (P) + interest (I), therefore one version of the future value formula is {eq}A=P+I {/eq}. Additionally, it has already been discovered that the formula for interest is {eq}I = PRT {/eq}. Therefore, another version of the future value formula can be written as principal value (P) + interest (PRT) or {eq}A = P +PRT {/eq}. Finally, notice that the second version of the future value formula has two Ps in the formula. This means that we can factor out a P, simplifying the future value formula to a third version of {eq}A = P(1+rt) {/eq}.
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FAQs
Simple interest is calculated by multiplying the principal, the amount of money that is initially invested or borrowed, by the rate, the speed at which the interest grows, and the time, how long money is being invested or borrowed. In other words, the formula for simple interest is I = P R T .
What is simple interest formula and definitions? ›
How to Calculate Simple Interest? Simple Interest is calculated using the following formula: SI = P × R × T, where P = Principal, R = Rate of Interest, and T = Time period.
What is the formula for interest and examples? ›
For calculating simple interest, Simple Interest = (P x T x R)/ 100 = (5000 x 2 x 5)/ 100 = 500 Rs. So, Shravan will have a total of 5500 Rs. at the end of two years.
How do you calculate simple interest for dummies? ›
The formula to determine simple interest is an easy one. Just multiply the loan's principal amount by the annual interest rate by the term of the loan in years. This type of interest usually applies to automobile loans or short-term loans, although some mortgages use this calculation method.
How do you explain simple interest to a child? ›
It might help to get your kids to think of interest as a reward for saving money or the cost of borrowing it. Interest gets paid at a certain rate, called an annual percentage rate (APR for short). Let's say you pay $100 into a savings account with an APR of 5%. Five percent of $100 is $5.
How to calculate simple interest with an example? ›
We are given the principal amount, P = $3,000, the interest, I = 33.00, and the loan period in years is t = 1. The interest rate is determined from the simple interest formula, I = Prt, solving for r: Therefore, the annual simple interest rate is 1.1%.
What is the purpose of the 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.
What is simple interest formula answer? ›
The formula for simple interest is SI = P × R × T / 100, where SI = simple interest, P = principal amount, R = the interest rate per annum, and T = the time in years. To calculate the simple interest (SI), multiply the principal amount by the interest rate and the time in years, and then divide it by 100.
What is the best way to calculate interest? ›
The formula for calculating simple interest is A = P x R x T.
- A is the amount of interest you'll wind up with.
- P is the principal or initial deposit.
- R is the annual interest rate (shown in decimal format).
- T is the number of years.
The principal amount is Rs 10,000, the rate of interest is 10% and the number of years is six. You can calculate the simple interest as: A = 10,000 (1+0.1*6) = Rs 16,000. Interest = A – P = 16000 – 10000 = Rs 6,000.
Multiply your principal balance by your interest rate. Divide your answer by 365 days (366 days in a leap year) to find your daily interest accrual or your per diem.
What is the compound interest on a three year $100.00 loan at a 10 percent annual interest rate? ›
Summary: The compound interest on a three-year, $100.00 loan at a 10 percent annual interest rate is $ 33.1.
What do you learn about simple interest? ›
Simple interest is what it costs to borrow money without compound interest, which is interest on the principal and on the interest. Simple interest is calculated by looking at the principal amount borrowed, the rate of interest, and the time period it will cover.
What is simple interest in general mathematics? ›
The interest that is earned on solely the original amount of money being used is called simple interest. To calculate the amount of simple interest, we have to consider the original amount of money, called principal (present value), the time (period over which the money is being used), and the (simple) interest rate.
What is the principle in the simple interest formula? ›
Principal: The principal is the original amount borrowed for a loan or the original amount invested. Interest rate: The interest rate is the proportion of the principal that is added to the principal at each time period. This time period must be the same unit of time as the time period used to calculate t.
At what rate of simple interest will a sum of money double itself in 20 years? ›
A sum of money doubles itself in 20 years. ∴ A sum of money doubles itself in 20 years in simple interest at 5% interest rate.
