How to calculate simple interest

How to calculate simple interest

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Simple Interest is a basic technique for determining the interest rate for a loan/principal amount. Simple interest is a model utilized in a lot of places, like banks, finance centers, automobile loans, etc. Whenever you make your loan payment, in the beginning, it goes toward the monthly interest, then the rest pays on the amount of the principal. We are going to talk about the definition, as well as the formula for simple interest, the way to determine simple interest, and show some examples.

Simple Interest Defined

Simple Interest (S.I) is a technique for determining the interest rate for a principal quantity amount of money. Did you ever borrow money from someone when you ran out? Or perhaps you’ve lent someone money. What occurs after money is borrowed? You are supposed to use it for whatever the reason was for borrowing it. Then, you pay it back when it is due to whomever you borrowed it from. That’s the way borrowing money is supposed to work. 
But most regular people you might borrow money from don’t charge you interest, but if you borrow from a bank or other financial institute, you will pay back more money than you borrowed because they charge interest. The amount is different depending on the place you borrow from, the amount of the loan, and the going rates. That is called simple interest and is the term used a lot in the banking industry.

Formula for Simple Interest

The simple interest formula assists you in finding the amount as long as you know the amount of the principal, interest rate, and timeframe for payback.

The formula for simple interest is:
Where \(SI \ =\) simple interest
\(P \ =\) Principal
\(R \ =\) Interest rate (in percentage)
\(T \ =\) Time duration (in years)

To determine the total amount, use the following formula:

Amount (\(A\)) \(=\) Principal (\(P\)) \(+\) Interest (\(I\))

Where,
Amount (\(A\)) is the total of the money to pay back when the timeframe ends for which the money was borrowed.

This total amount formula in case of simple interest may additionally be put down as:
\(A \ = \ P(1 \ + \ RT)\)
Here,
\(A \ =\) Total amount after the provided timeframe
\(P \ =\) Principal amount or the initial loan amount
\(R \ =\) Rate of interest (per annum)
\(T \ =\) Time (in years)

What kinds of simple interest are there?

Simple interest may be put into two categories whenever the timeframe is calculated in terms of days. There are both ordinary and exact simple interests. The first is a \(SI\) which uses \(360\) days as the exact number of days in a year. But exact simple interest uses the precise amount of days in a normal year (\(365\)) or \(366\) if it’s a leap year.

Simple Interest Calculations

Here are a few simple interest examples utilizing the simple interest formula found in mathematics.

Example one:
Someone gets a loan for \($10,000\) from the bank for a timeframe of one year. The interest rate is \(10\) percent a year. Figure out the interest rate, as well as how much he’ll need to pay off when the year is over:

Answer:
The loan amount \(= \ P \ = \ $10,000\)
Rate of interest annually \(= \ R \ = \ 10%\)
Timeframe borrowed for \(= \ T \ = \ 1\) year
So, simple interest for one year, \(SI \ = \ \frac{(P \times R \times T)}{100} \ = \ \frac{(10,000 \times 10 \times 1)}{100} \ = \ $1,000\)
The total that must be paid to the bank when the year is over \(=\) Principal \(+\) Interest \(= \ 10,000 \ + \ 1,000 \ = \ $11,000\)

Example two:
Someone borrows \($50,000\) for \(3\) years at an interest rate of \(3.5%\) per year. Determine the interest built up when the three years are over.

Answer:
\(P \ = \ $ 50,000\)
\(R \ = \ 3.5%\)
\(T \ = \ 3\) years
\(SI \ = \ \frac{(P \times R \times T)}{100} \ = \ \frac{(50,000 \times 3.5 \times 3)}{100} \ = \ $5,250\)

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