What will be the simple interest on a sum of Rs 1000 after 2 years at a rate of 5% per year?

Use this simple interest calculator to calculate the simple interest on your savings or loan without compounding. That is to say that interest is only calculated on the principal, not on previously accumulated interest.

Advertisements

Table of contents:

To calculate simple interest on a lump sum, multiply your lump sum figure by the interest rate per period (as a decimal) and then again by the number of periods you wish to calculate for. The formula for this is P × r × t.

To give an example, if you wish to calculate simple interest on a $5,000 loan at a 3% annual interest rate for 2 years, your calculation would be:

5000 × 0.03 × 2 = $300

Likewise, if you borrow $500 from a friend at 3% per month for 6 months, your simple interest calculation would be:

500 × 0.03 × 6 = $90

Note that the interest rate (r) and time period (t) are in the same time units (years for the first calculation and months for the second). This is important for these interest calculations to work.

These simple interest calculations assume that interest is not compounded. Savings accounts earn compound interest, meaning that interest is calculated on the already accumulated interest over time. So, if you're looking to work out compound interest, you should use this interest calculator instead.

Simple interest formula (principal + interest)

If you wish to calculate a figure for interest AND principal, the formula for this is A = P(1 + rt), where P is the initial principal, r is the interest rate and t is the time period.

A = P(1 + rt)

Where:

• A = the future value
• P = the initial principal
• r = annual interest rate (decimal)
• t = the time in years

Let's say that we want to lend a friend $5,000 at a yearly interest rate of 5% over 4 years. Your calculation might look like this:

Our formula: A = P(1 + rt)

• P = 5000.
• r = 5/100 = 0.05 (decimal).
• t = 4.

Plugging those figures into our simple interest formula, we get:

A = 5000 × (1 + (0.05 × 4)) = 6000

Your friend will owe you back $6,000 in 4 years time. Of that, the interest will be $1,000, which works out at $250 per year. The table below shows how the interest would accrue over each of the four years.

Variations of the simple interest formula

Here are some other useful variations of the simple interest formula, which allows you to calculate principal, rate of interest and timeframe.

Where:

• A = future value of the investment/loan
• I = total interest
• P = principal amount
• r = interest rate (decimal)
• R = interest rate (percentage)
• t = time periods

What is simple interest?

Simple interest is a form of interest commonly used for transactions such as auto loans, student loans or personal loans.

A simple interest calculation takes a sum of money (principal) and calculates regular interest only on that original amount, without the effect of compounding. This is in direct contrast to compound interest, where accumulated interest is added back to the principal for each calculation, so that you effectively earn interest on already accumulated interest.

It is this difference that makes the simple interest calculation widely regarded as least advantageous to savers and most advantageous to borrowers. 1

See also: Daily Compounding | SIP Calculator | APY Calculator

How to use our simple interest calculator

To use our simple interest calculator, enter your starting balance, along with the annual interest rate and the start date (assuming it isn't today). Then, enter either a number of years, months or days that you wish to calculate for or an end date. You can also include any regular additional deposits and withdrawals (additions and deductions). Once you click the 'calculate' button, the simple interest calculator will show you:

• The total interest earned
• The final value (principal plus accrued interest)
• A monthly breakdown of interest earned

To conclude

I hope this calculator and article has helped you with calculating the interest on your savings or loan. If you have any questions or suggestions for improvements, please do drop me a line.

Question 3 Simple Interest Exercise 13.1

Next

Answer:

Given Principal amount P = Rs 400

Time period T = 2 years

Rate of interest R = 5% p.a.

We know that simple interest = (P × T × R)/100

On substituting these values in above equation we get

SI = (400 × 2 × 5)/100

= Rs 40

Was This helpful?

Calculate simple interest on the principal only, I = Prt. Simple interest does not include the effect of compounding.

Simple Interest Formula

I = Prt

Where:

• P = Principal Amount
• I = Interest Amount
• r = Rate of Interest per year in decimal; r = R/100
• R = Rate of Interest per year as a percent; R = r * 100
• t = Time Periods involved

Notes: Base formula, written as I = Prt or I = P × r × t where rate r and time t should be in the same time units such as months or years.

Time conversions that are based on day count of 365 days/year have 30.4167 days/month and 91.2501 days/quarter. 360 days/year have 30 days/month and 90 days/quarter.

Simple Interest Formulas and Calculations:

This calculator for simple interest-only finds I, the simple interest where P is the Principal amount of money to be invested at an Interest Rate R% per period for t Number of Time Periods. Where r is in decimal form; r=R/100. r and t are in the same units of time.

• Calculate Interest, solve for I
• Calculate Principal Amount, solve for P
• Calculate rate of interest in decimal, solve for r
• Calculate rate of interest in percent
• Calculate time, solve for t

Simple interest is a method to calculate the amount of interest charged on a sum at a given rate and for a given period of time. In simple interest, the principal amount is always the same, unlike compound interest where we add the interest of previous years principal to calculate the interest of the next year.

In this lesson, you will be introduced to the concept of borrowing money and the simple interest that is derived from borrowing. You will also be introduced to terms such as principal, amount, rate of interest, and time period. Through these terms, you can calculate simple interest using the simple interest formula.

What is Simple Interest?

Simple interest is a quick and easy method to calculate interest on the money, in the simple interest method interest always applies to the original principal amount, with the same rate of interest for every time cycle. When we invest our money in any bank, the bank provides us interest on our amount. The interest applied by the banks is of many types one of them is simple interest. Now, before going deeper into the concept of simple interest, let's first understand what is the meaning of a loan.

A loan is an amount that a person borrows from a bank or a financial authority to fulfill their needs. Loan examples include home loans, car loans, education loans, and personal loans. A loan amount is required to be returned by the person to the authorities on time with an extra amount, which is usually the interest you pay on the loan.

Simple Interest Formula

Simple interest is calculated with the following formula: S.I. = P × R × T, where P = Principal, R = Rate of Interest in % per annum, and T = Time, usually calculated as the number of years. The rate of interest is in percentage r% and is to be written as r/100.

• Principal: The principal is the amount that initially borrowed from the bank or invested. The principal is denoted by P.
• Rate: Rate is the rate of interest at which the principal amount is given to someone for a certain time, the rate of interest can be 5%, 10%, or 13%, etc. The rate of interest is denoted by R.
• Time: Time is the duration for which the principal amount is given to someone. Time is denoted by T.
• Amount: When a person takes a loan from a bank, he/she has to return the principal borrowed plus the interest amount, and this total returned is called Amount.

Amount = Principal + Simple Interest

A = P + S.I.

A = P + PRT

A = P(1 + RT)

Simple Interest Example: 

Michael's father had borrowed $1,000 from the bank and the rate of interest was 5%. What would the simple interest be if the amount is borrowed for 1 year? Similarly, calculate the simple interest if the amount is borrowed for 2 years, 3 years, and 10 years?

Solution:

Principal Amount = $1,000, Rate of Interest = 5% = 5/100. (Add a sentence here describing the given information in the question.)

Now, we can also prepare a table for the above question adding the amount to be returned after the given time period.

What Types of Loans use Simple Interest?

Most banks these days apply compound interest on loans because in this way banks get more money as interest from their customers, but this method is more complex and hard to explain to the customers. On the other hand, calculations become easy when banks apply simple interest methods. Simple interest is much useful when a customer wants a loan for a short period of time, for example, 1 month, 2 months, or 6 months.

When someone goes for a short-term loan using simple interest, the interest applies on a daily or weekly basis instead of a yearly basis. Consider that you borrowed $10,000 on simple interest at a 10% interest rate per year, so this 10% a year rate divide into a rate per day which is equal to 10/365 = 0.027%. So you have to pay $2.73 a day extra on $10,000.

Simple Interest vs Compound Interest

Simple interest and compound interest are two ways to calculate interest on a loan amount. It is believed that compound interest is more difficult to calculate than simple interest because of some basic differences in both. Let's understand the difference between simple interest and compound interest through the table given below:

Simple Interest: Tips and Tricks

• To find the time period, the day on which money is borrowed is not taken into account, but the day on which money has to be returned is counted.
• The rate of interest is the interest on every $100 for a fixed time period.
• Interest is always more in the case of compound interest as compared to simple interest.
• The formula or methods to calculate compound interest is derived from simple interest calculation methods.
• Rate of interest is always kept in fractions in the formula.

Think Tank:

• What if a bank provides you an interest such that your money doubles every day, if you invested $1 on day 1, in how many days you will become a billionaire?
• Will you invest if a bank provides a negative rate of interest?

1. Example 1: Robert purchased a car worth $48,000, he borrowed the money from the bank at 10% per annum for a period of 4 years. How much amount he has to pay after the period.

   Solution:

   The principal value for the car is $48,000, the rate of interest is 10% and the time period given is 4 years.

   Using the formula for amount, A= P(1+RT), A= 48000 × (1 + 10/100 × 4)

   A= 48000 × (1 + 2/5)

   A= 48000 × 7/5

   A= $67200

   Therefore, Robert has to pay $67,200.

2. Example 2: If Maria borrowed a sum of $46,500 for a period of 21 months at 20% per annum, how much simple interest will she pay?

   Solution:

   The principal amount is $46,500 and the rate of interest is 20% = 20/100. The time period given is 21 months = 21/12 years. Using the formula for interest I = P ×R × T. I = 46500 × 20/100 × 21/12, so I = $16800.

   Therefore, Maria is going to pay $16,800.

Show Solution >

go to slidego to slide

FAQs on Simple Interest

Simple interest is used in cases where the amount that is to be returned requires a short period of time. So, monthly amortization, mortgages, savings calculation, and education loans use simple interest.

What are the Types of Simple Interest?

Simple interest is of two types ordinary simple interest and exact simple interest. In the ordinary simple interest, a year is considered of 360 days while calculating the interest while in exact simple interest a year is considered of 365 (or 366 days of a leap year) days. Both methods use the same formula to calculate simple interest.

Are Home Loans Simple or Compound Interest?

Home loans take a long time to repay, so the interest added by the lender is usually a compound interest.

Are Car Loans Simple or Compound Interest?

Car loans or auto loans use simple interest to calculate the interest. The borrower agrees to pay the money back, plus a flat percentage of the amount borrowed. But in case the borrower fails to repay the amount on time, the company or the lender may start charging compound interest.

What is the Difference between Simple and Compound Interest?

Simple interest is the interest paid only on the principal, whereas, compound interest is the interest paid on both principal and interest compounded in regular intervals.

How do you Calculate Simple Interest?

Simple Interest is calculated using the following formula: SI = P × R × T, where P = Principal, R = Rate of Interest, and T = Time period. Here, the rate is given in percentage (r%) is written as r/100. And the principal is the sum of money that remains constant for every year in the case of simple interest.

How do I Calculate Simple Interest Monthly?

To calculate simple interest monthly, we have to divide the yearly interest calculated by 12. So, the formula for calculating monthly simple interest becomes (P × R × T) / (100 × 12).