Simple interest formula and examples

After two years, a woman with \$50000 in a bank received \$5000 in interest on her investment. Find the interest rate that was paid on the money that was deposited. Simple interest affects people in various aspects of their financial life, like when borrowing money, depositing, or investing money, and lending money. Car loans are amortized monthly, which means that a portion of the loan goes to pay the outstanding loan balance every month, and the remainder goes toward the interest payment. You often have to borrow money from banks in the form of a loan.

Department stores often offer major appliances on a simple-interest basis for periods of up to one year. So, suppose you buy a refrigerator for $2,000 and pay simple interest at an annual rate of 8%. Let’s see one simple example to understand the concept of simple interest.

We provide high-quality math worksheets for more than 10 million teachers and homeschoolers every year. Find the simple rate given a principal amount of \$25000, with an interest of \$1000, and over 2 years. In the business world, suppliers often offer a discount to encourage early payment of their invoices. Simple interest is better for borrowers because it doesn’t account for compound interest. On the other hand, compound interest is a key to building wealth for investors.

Since simple interest is calculated only on the principal, it is easier to determine than compound interest. That means you’ll always pay less interest with a simple interest loan than a compound interest loan if the loan term is greater than one year. Find the total amount received by Michael if he invested a principal amount of  $\$3000$ and receives $\$1500$ as interest. So, after one year, your friend owes you the original $\$1,000$ plus an additional $\$50$ in interest ($5\%$ of $\$1,000$).

Acceleration (Global Media and Information Literacy Week Themed) Math Worksheets

Simple interest is a type of interest that is calculated only on the initial amount borrowed/invested, without considering any interest charged/earned in previous periods. It is a fixed percentage of the principal amount that is charged or earned over a specific period of time. Simple interest is a way to calculate how much interest will be charged on a sum of money at a specific rate and for a particular time duration.

What Are Some Financial Instruments That Use Simple Interest?

( b ) Calculate the total amount that she must pay to the bank, including the principal and interest. Stephanie took out a loan from the bank for \$5200, and they charged her \$182 in simple interest over a year. Simple interest always works in favor of the borrower because it keeps the total cost lower than if interest was compounded. Simple interest does not benefit investors because it does not take into consideration interest on interest, which makes returns higher.

In this article, we learned about the concept of simple interest and how it is calculated using the principal amount, interest rate, and time period. Simple interest provides a straightforward method to determine the interest accrued on a loan or investment. To reinforce our understanding, let’s now apply the simple interest formula through solving examples and attempting MCQs for better comprehension. Short-term loans, such as auto loans, instalment loans, personal loans, and some types of mortgages, are included in the borrowing transactions. Simple Interest is an easy method of calculating the interest for a loan/principal amount.

Other Consumer Loans

This could be daily, monthly, yearly, or some other frequency. Yes, simple interest is easier to understand and calculate, making it advantageous for short-term loans with straightforward interest calculations. To find the simple interest calculator (SI calculator), click here. This calculator allows us to enter the values of principal, rate xero ceo rod drury of interest, and time duration (in years/months/days) and finds the simple interest showing step-by-step solution.

As the outstanding loan balance diminishes every month, the interest payable reduces, which means a greater part of the monthly payment goes toward the principal repayment. If you don’t let the principal payments vary, as in an interest-only loan (zero principal payment), or by equalizing the principal payments, the loan interest itself doesn’t compound. If you make partial payments to a simple interest loan, the payment will be applied to interest first, and any remainder will be used to reduce the principal.

What Types of Loans use Simple Interest?

1. Let us now calculate the simple interest by substituting the known values into the formula.
2. When a person borrows money, there is a price they must pay the lender called interest.
3. So, monthly amortization, mortgages, savings calculation, and education loans use simple interest.
4. In this case, the interest rate is 10% over a two-year period for a principal of \$25,000 and an interest of \$1,000.
5. Car loans are amortized monthly, which means that a portion of the loan goes to pay the outstanding loan balance every month, and the remainder goes toward the interest payment.
6. Find the interest rate that was paid on the money that was deposited.

Let’s say that you are borrowing $10,000 from Bank A to finance an automobile purchase. It’s a simple interest loan with a rate of 5% and a term of 5 years. For example, let’s say that a student obtains a simple interest loan to pay for one year of college tuition. Generally speaking, simple interest is a good thing when you’re borrowing.

Those costs are included in your APR, which is typically higher than your interest rate. When a person borrows money, there is a price they must pay the lender called interest. It is common to indicate interest as a percentage, which can be either simple or compound. Two methods for calculating interest on a loan amount are simple interest and compound interest. Because of some fundamental distinctions between the two, compound interest is thought to be more challenging to compute than simple interest.

After that, you return the money whenever you get net capital expenditure the next month’s pocket money from your parents. Simple interest can be advantageous for borrowers because of its relatively lower cost of money. However, bear in mind that, because of its simple calculation, it gives only a basic idea of cost that may not account for other charges/fees that a loan may include.