**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

r

= 5%

= .05 per week

I

= Pnr

= $100 × 8 × .05

= $40

Total Payable Amount

= Principal + Interest

= P + I

= $100 + $40

= $140