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
- 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
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
