Simple Interest Formula How To Calculate Uses And Examples
Simple interest is the rate of interest at which you lend or borrow money. When the borrower takes money from the lender, he pays an extra amount to the lender. The principal is the amount of money borrowed from the lender and taken for a certain period. Interest is the amount that you pay back to your lender.
Simple interest is calculated as the product of the principal, the number of periods, and the interest rate. This is not compounded interest but rather interest on interest. The payment will be made in relation to the monthly interest and the principal amount.
Simple Interest Calculation
For the calculation of simple interest, use (P x R x T) /100
Here, P is the Principal
The rate of interest is R
The term of the loan is expressed in years
You multiply the principal amount multiplied by the interest rate and the length of the loan/deposit. The duration should be expressed in years, not months. If you give the input in months, then the formula is
(P x R x T) / (12 x 100)
The formula to calculate the maturity value or total amount payable, including principal and interest, is as follows:
FV = (1 + r x (t) x P)
The future value is FV.
The principal amount is the FV of interest payable or receivable
Now, let’s see what you would have to pay if your bank used simple interest.
Calculation of Simple Interest on Deposits
Example 1: If you deposit Rs. If you deposit Rs.
(60,000 x 2 x 8 = 9,600)
You will receive Rs. 9,600 as interest at the end of a 2-year term. 9,600. The maturity amount of the FD is Rs. 69,600.
Simple Interest Calculation for Loans
Let’s say you borrowed Rs. A lender will lend you Rs. The interest rate is 20 percent, and the duration is three years. The interest rate that you’ll have to pay the bank is
(4,00,000. x 20. x 3. 3)/100 = 2,40,000
You will pay Rs. 2.4 lakhs. The total amount that will have to be paid back to the bank is Rs. 6.4 lakhs. This will amount to approximately Rs. 17,777.
Differences between Simple Interest and Compound interest
Simple Intent
Compound interest
Simple interest is calculated on the principal amount over the entire tenure.
The principal amount is calculated monthly, quarterly, or half-yearly.
The interest accumulated on the principal does not add to the calculation of interest for the following period.
Interest accrued in the previous period will be added to the interest calculation for the following period.
Interest accumulates slowly
Interest is accumulated quickly because interest is accrued not only on the interest amount but also.
The simple interest rate is not sufficient for saving and investing, but it is beneficial if you borrow money.
Compound interest is more profitable on investments and savings, but it can be costly on loans.
Simple interest benefits the borrower, as he pays less for a loan taken at simple interest. Lenders do not gain anything.
The lender benefits, but the borrower does not. Compound interest will cost the borrower more.
Easy to calculate
It’s hard to calculate
Simple Interest Calc
- This tool calculates interest on loans without compounding.
- Calculates the simple interest daily, monthly, or annually.
- Enter the principal amount, the annual rate, and the period to be calculated in days, months, or years. The calculator will then show you the interest immediately.
How do simple interest calculators work?
Simple interest calculator displays the total amount, including both principal and interest. The calculator works based on:
A = P(1 + Rt)
The principal amount is P
The rate of interest is R
The number of years is t.
A = Total amount accrued (principal and interest).
Interest = A + P.
Now, let us see an example.
The principal amount is Rs. The principal amount is Rs. The simple interest is calculated as
A = 24,000 (1 + 0.2*6) = Rs. 24,000
Interest = 24,000 minus 20,000 = Rs. ,0004
Conclusion
You can save a great deal of money on your repayments if you get a loan with simple interest. You will earn less on loans with compound interest. It is best to compare the interest rates on financial products before making a decision.
Simple Interest Calculation FAQs
1. How do I calculate interest?
The formula to calculate simple interest is P*R*T. P is the initial principal amount, R is the annual interest rate expressed as a decimal, and T is the number of periods. (Generally, one-year periods).
2. Is the formula to calculate the maturity amount different when you enter the tenure in months instead of years?
If you enter the duration of your deposit in months, then a different formula will be used to calculate simple interest.
