Calculating simple interest isn't difficult at all. Read this post to know the necessary formulas.

Neha Joshi
Jun 3, 2019

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Of all the things you probably learn in your math class, *interest* is one concept you must pay attention to; it has a lot of applicability in life later on. While it is relatively simpler to calculate simple interest, a few complexities can leave you dumbfounded. Let's understand the concept and then see how to go about working on it.

Suppose, A borrows money from B. In this case, A is charged interest for getting this *privilege*, and B earns this interest. A is the *borrower* and B is the *lender* in this transaction.

Simple interest is charged on the basic amount of money borrowed, called the *Principal*. Simple interest loans are mostly short-term loans and the interest is calculated in *percentage*. Simple interest is what the bank pays you on your deposits.

A borrows USD 20,000 from B for a term of 6 years at 5% simple interest.

Here, the P (Principal) = 20,000, R (Rate of Interest) = 5%, and T (Term) = 6.

*Note*: 5% = 5/100 = 0.05

So, going by our formula of I = P x R x T,

Simple Interest = 20,000 x 0.05 x 6

= 1,20,000 x 0.05

=**6,000**

Here, the P (Principal) = 20,000, R (Rate of Interest) = 5%, and T (Term) = 6.

So, going by our formula of I = P x R x T,

Simple Interest = 20,000 x 0.05 x 6

= 1,20,000 x 0.05

=

It is not necessary that a particular amount of money is always borrowed for a few years. It can also be borrowed for a few days or some months. However, we do not consider months but only days. Let's have a look at one more example.

A borrows USD 10,000 from B, from February 14, 2011 to August 12, 2011, at 10% simple interest.

Now, the formula is still I = PRT. But the T here will change. Let's see how.

Now, the formula is still I = PRT. But the T here will change. Let's see how.

We need to first count the number of days in each month that the money is borrowed for. Here we have,

February = 15, March = 31, April = 30, May = 31, June = 30, July = 31, and August = 12.

February = 15, March = 31, April = 30, May = 31, June = 30, July = 31, and August = 12.

. ' . 15 + 31 + 30 + 31 + 30 + 31 + 12 = **180** days.

But in the formula, we will consider, 180/365 as it is 180 days out of 365 days.

So, the end result formula for simple interest will be =**10,000 x 0.10 x 180/365**

But in the formula, we will consider, 180/365 as it is 180 days out of 365 days.

So, the end result formula for simple interest will be =

Simple interest loans are calculated in a similar way. To understand better, let's look at this example.

A woman purchases a designer bag worth USD 10,000. Her interest rate stands at 10% and the time period at 1 year. She also opts for weekly installments.

*How much interest will she have to pay*?

A woman purchases a designer bag worth USD 10,000. Her interest rate stands at 10% and the time period at 1 year. She also opts for weekly installments.

I = P x R x T

= 10,000 x 0.10 x 1

=** USD 1,000**

*How much will she have to pay back in all*?

Principal Amount + Interest

= 10,000 + 1,000

=** USD 11,000**

= 10,000 x 0.10 x 1

=

Principal Amount + Interest

= 10,000 + 1,000

=

Total payments / loan period x no. of weeks in a year.

. ' . 11,000 / 1 x 52

= 11,000 / 52

=

Now that you know how to calculate simple interest, it'll be easier for you to manage your finances in respect to loans and the like.