Interest is something that we owe, and we receive as well. But have you ever think about calculating the exact interest rate that you owe to the creditors or the interests which you are going to obtain from the bank. Therefore, there is a Simple Interest formula to calculate the interest.
What is Simple Interest and Formula?
Simple Interest that applied for the short term loans & investments (no more than one year) The simple interest ratio typically expressed as a percentage. The amount of interest we owe, or we obtain depends upon some quantities that we are going to learn next.
We know that simple interest is something that applied for short duration loans and investments. In other words, the amount we borrowed or invested initially and to calculate the interest we have to use the simple interest formula.
It is a satisfactory customer situation, and the amount borrowed or invested is called principal and we denominate it as “p”, The interest charged on the loans or earned on the investment designated by “r” usually annual interests rates are gets calculated as the duration of any investment or mortgage would be at least one year. In some cases, it can be in months or even days. The tenure of loan we denominate by “T.” That’s how the formula works.
P*R*T: Simple Interest.
Let me show you an example of Sarah, who borrowed a principal amount of 2000$ with the annual interest rate of 7% charged by the creditor or bank. The tenure of 1 year, before that the Interest should be converted into the decimal form, and for this, you need to divide 7/100 to get a decimal form of the interest rate charged on the principal amount.
Let us show you the calculation of simple interest charged on Sarah’s principal and the information she provided.
P * R * T: Simple Interest
I = Prt = (2,000)(0.07)(1) = $140.
Therefore, Sarah owes 140$ annual interest for her loan to the bank. After one year she has to pay around 2140$ total along with interest charged.
Sarah invested by opening a Fixed amount of 500$ at the Savings interest rate of 6%, and tenure of the fixed deposit is 1 Year. How to calculate the interest Sarah will receive at the end of tenure.
You can use the same formula, but again you need to convert the interest rate into decimal form first. You can do this by dividing 6/100, and you will be getting a 0.06 interest rate in decimal form.
P * R * T: Simple Interest
I = Prt = (500)(0.06)(1) = $30.
You see, 30$ is the interest Sarah will receive at the end of the tenure of her fixed deposit.
That is how we calculate simple interest.
In the Banking area, It is quite common to calculate the interests daily. We do calculate the compound interest and as well as simple interest on the investments or loans we initially have taken. The same we explained in this post that how one can calculate simple interest in an easy way.