An account holder can only gain interest on the principal, and a borrower will never have to pay interest on a simple interest loan or savings account. Simple interest doesn’t compound, meaning a borrower will NOT pay any interest on a loan, which has already been paid to date. A Few types of loan use simple interest formula, notably auto loans, and short-term personal loans. Mortgages, most notably biweekly mortgages, use simple interest calculations as well. It accelerates the payoff date of borrowers who pay their interest more frequently on a biweekly mortgage as well as allowing them to pay their mortgages off faster.
A lender applies the payment to the monthly interest first; the remaining proportion reduces the principal each month. Since the lender never accrues interest, the borrower pays each month the interest in full, not accruing interest each month. Putting the loan on a repayment schedule and paying it back on time will help her to save money and keep the loan’s due date. The lender calculates new interest on the old interest after adding a portion of the old interest to the loan, as opposed to compound interest. Savings accounts also do not award simple interest, since they typically use compound interest calculation.
The formula for simple interest :
A simple interest rate is computed by multiplying the principal amount by the interest rate over the period which is generally expressed in terms of years. The formula is given below:
Simple interest (SI) = P×R×T / 100
Adding the principal to the total amount computed after S.I. has been calculated will give the borrower or lender the amount the borrower must pay or the lender will collect. The formula for the total amount is as follows:
Important terms to consider:
- S.I. – Simple Interest
- P – Principal Amount
- A – Total Amount
- R – Rate of Interest
- T – Time (in Years)
How to get other variables through using simple interest formula:
Calculate the interest or total amount using this formula and solve for the missing parameters. You can reduce this formula to one of the following forms:
- Interest can be calculated as follows:
I = PTR/100
- A principal amount can be calculated by using the formula:
P= (I × 100) / RT
- To find the rate of interest, we must take the following formula:
R = (I x 100)/PT
R (in decimal form) = I/PT
So, if we want to calculate the rate of interest in percent, we should use
R = R * 100
- You can calculate the time using this formula:
T = (I × 100) / PR
Based on the data provided in each scenario, these formulas can all be applied.
Example of simple interest problem:
For an amount of Rs. 1000 with a period of 1 year and an interest rate of 10%, calculate the Simple Interest. Also, calculate the amount at the end of one year.
Solution- According to the formula of simple interest we have,
S.I. = [(Principal (P) × Time (T) × Rate (r)) / 100]
So, from the above values,
S.I. = [(1000 × 1 × 10)] / 100
So, the simple interest at the end of 1 year will be Rs. 100.
For the amount after 1 year,
A = P + S.I.
So, A = 1000 +100 = 1100
Hence, the total amount at the end of the given tenure (i.e. 1 year) will be ₹1100.
Simple interest has a lot of significance when it comes to taking loans, but most loans today are on compound interest factors. If you want to know about both these concepts in more detail, you can visit the Cuemath website and get the answer to all your maths-related queries by experts.