Simple Interest abbreviated as S.I is a technique of computing the interest amount for some principal amount of money. Imagine that you have ever borrowed money from your friend when your pocket money is drained? Or lent maybe? So, what happens when you borrow money? Firstly, you use that money for the purpose you had borrowed it. After that, you return the money in addition to some extra amount for the time period you have borrowed and that’s what is called simple interest.
The Formula for simple interest enables us to find out the interest amount if the principal amount, rate of interest and time duration is given.
That being said, the simple interest formula to calculate interest rate is
SI = (P × R ×T) / 100
SI = simple interest
P = principal amount or the original amount being borrowed
R = rate of interest (in percentage)
T = time period (in years)
For the purpose of calculating the total amount, the formula below is used:
Amount (A) = Principal (P) + Interest (I)
Amount (A) = total money paid back at the termination of the time period for which it was borrowed.
How to Calculate Interest Rate
In the real world, money is not free to borrow. You have to borrow money from banks, financial institutions and even from a friend/relative in the form of a loan. During payback, besides the loan amount, you pay some additional money that depends on the loan amount and also upon the time for which you borrow. This is known as the simple interest. This term finds a sizable usage in banking.
Simple Interest Formula For Months
The formula to calculate interest rate on a yearly basis is already known. Now, let's check the formula to calculate the interest rate for months. Let's say P is the principal amount, R be the rate of interest annually and n be the time duration (in months), then the simple interest formula can be written as:
Simple Interest for ‘n’ months = (P × n × R)/(12 ×100)
Difference Between Simple Interest and Compound Interest
There is another kind of interest which we call a compound interest. The major difference between a simple and compound interest is that the simple interest relies upon a loan or a principal amount of a deposit whereas the compound interest is based on the principal amount and interest that is collected in every period of time.
Solved Examples Using Simple Interest Formula
Let’s undertake a simple example to understand the concept of simple interest.
Mr. Bharat borrowed a loan of Rs 20000 from a bank for the time period of 1 year. The rate of interest charged is 8% per annum. Calculate the interest and the amount he has to pay at the end of a year.
Given, the loan sum = P = Rs 20000
Rate of interest per annum = R = 8%
Time for which the money is borrowed = T = 1 year
Therefore, simple interest for a year, SI = (P × R × T) / 100
= (20000 × 8 × 1) / 100 = Rs 1600
Hence, the amount that Mr. Bharat has to pay to the bank at the end of the year =
Principal + Interest
= 20000 + 1600
= Rs 21,600 .