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How to Calculate Simple Interest (Explicated With Examples)

Calculating simple interest isn't difficult at all. Read this post to know the necessary formulas.
Neha Joshi Jun 3, 2019
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.

What is Simple Interest?

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.

Learn How to Calculate Simple Interest ...

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

How to Calculate Simple Interest if Time is not in Years, but in Days?

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.
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.
. ' . 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

How to Calculate Simple Interest on a Loan?

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?
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
How much will she have to pay every week?

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

. ' . 11,000 / 1 x 52
= 11,000 / 52
= USD 211.54
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.