How To Calculate Simple Interest

Interest has always played a big role in the lives of many. So true in today’s economic slump—we have read in newspapers, magazines, saw on television, and even in churches how interests have affected all of us. We have interests in our credit card billing statements, commercial bank statements, and balances. Interest is the amount of money (called principal) charged for a certain period of time—from the time it was borrowed until the time it is paid back. The amount to be paid depends on the agreed interest rate between the borrower and the lender.

For a simple delay in payments due, additional interests are charges. Formulas for calculating interest can be very complicated and difficult to understand by many. The most simple computation for interests is the “simple interest” formula, the basic formula that we can use to study interest. How do we calculate simple interest? Here’s the formula:

Simple Interest = Principle x Rate x Time (in years)
I = P x R x T

    Principal (P) = the amount borrowed from the bank or put into the bank

    Rate (R) = the percent

    Time (T) = the number of years the money has to stay in the savings account or the number of years it will take for you to repay the loan

Remember though that the aspect of time must be in the number of years. Divide the time by 12 if it is given in months.

Here are some practical uses of calculating interests:

Example:  John’s parents gave him some money that he wanted to save for his wedding the next year. His uncle advised Ray to open a savings account—this will accumulate interest.

John deposited $2,000 into a savings account. The bank’s interest rate was 3.75%. He intended to keep the money in the savings account for 18 months. How much money will John have at the end of 18 months?

Formula: I = P x R x T
I = $2,000 x 3.75% x 18 months

Change the percent to a decimal (3.75% = 0.0375)
Divide the number of months by 12 (18/12 = 1.5)

I = $2,000 x .0375 x 1.5
I = $112.50

Add the interest to the principle:  I + P
$112.50 + $2,000

At the end of 18 months, John will have $2,112.50.

Example:  Linda availed of a student loan of $35,000 in school, with an interest rate of 8.5%. She promised to pay the loan off over 20 years. How much money will Linda pay in all?

Formula: I = P x R x T
I = $35,000 x 8.5% x 20 years

Change the percent to a decimal (8.5% = 0.085)

I = $35,000 x .085 x 20
I = $59,500

Add the interest to the principle:  I + P
$59,500 + $35,000

At the end of 20 years, Linda will have owed her school $94,500. Linda is most likely to pay a lesser amount since there is a move to lower the interest rate for all student loans to 7%.


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