# How to Calculate Simple Interest

Simple Interest: Basic Concept

Simple interest is the Interest on the loan amount
In this Interest is same for every year or every period

Example:

If \$100 is borrowed for 4% monthly simple interest
Each month the borrower has to pay \$4
If he has to pay back after one year
Total Amount is \$100 + (12 X \$4)
= \$100 + \$48
= \$148

Simple Interest: Key Facts
• Interest accumulates over regularly
• The Principal is constant
• The interest is calculated on the Principal
Compound Interest
• The interest is added to the Principal regularly
• Higher interest over time than simple interest

Simple Interest VS Compound Interest

If we compare the lending of \$100 at 10% of rate of interest for two years

In Simple Interest

First year Principal is \$100;
Interest- \$10
Second year Principal is \$100;
Interest- \$10
Total interest - \$20
In Compound Interest

First year Principal is \$100;
Interest- \$10
Second year Principal is \$110;
Interest- \$11
Total interest - \$21

Simple Interest: Formula

Simple Interest

Interest, I = Pnr

Therefore, the total amount to pay back after a certain period,
A = P + I
= P + Pnr
= P (1+nr)

Simple Interest: Example 1

John takes a loan of \$12,000 from a bank at a simple annual interest rate of 4%. How much interest he has to pay after ten years?

P = \$12,000
n = 10 years

r = 4% = 4/100
= .04 per year

I = Pnr
= (12000) X (10) X (.04)
= \$4800

The total interest for 10 years is \$ 4800

And the Total amount John has to pay back is
Principal + Interest
= \$12000 + \$4800
= \$16800

Simple Interest: Example 2

Jack borrows \$90 and agrees to pay 5% simple interest every week. Two months later, how much does he have to pay?

P = \$100

n = 2 months
= 2 × (4 weeks per month)
= 8 weeks

= 5%
= .05 per week

= Pnr
= \$100 × 8 × .05
= \$40

Total Payable Amount
= Principal + Interest
= P + I
= \$100 + \$40
= \$140