What is Simple Interest? How to Calculate

Learn the basics of simple interest, and how it is calculated using the simple interest formula.

CONCEPTS

Use this video lesson on the topic to discuss the financial terminology and basic economic and related concepts of

• Interest
• Saving
• Money
• Principal

PROCEDURE

Hand out the worksheet below (see the GET LESSON button near the bottom of the page).

Show students the video and have and have them complete the worksheet.  Then have a discussion about simple interest, how it is used, and how it is calculated. Review the questions on the worksheet.

What is Simple Interest

30 minutes

What is Simple Interest

It is important to understand simple interest and how it affects your borrowing or investments.

It can be used to calculate the interest rate on a sum at a certain rate for a specific period of time. Simple interest is simply the benefit of investing money or the cost of borrowing money, without taking into account compounding effects.

Here we will introduce you to simple interest and how it relates to investing or borrowing money. Additionally, you will learn terms like principal, interest rate, time period. These terms allow you to calculate simple interest by using the simple-interest formula.

Simple interest is an easy way to calculate interest on money. In simple interest, interest applies only to the original principal amount and the same rate for each time cycle. For example, if you are saving your money in a bank, the bank will pay interest for your money placed in the bank. One type of interest that banks pay is simple interest.

Simple interest is also important for understanding loans.  A loan is a amount that someone borrows from a bank to meet their financial needs. Examples of loans include personal loans, car loans and education loans. The borrower must return the amount of the loan to the lender by  the due date. Usually, this includes the interest that you have paid on the loan.

The Simple Interest Formula

Simple interest is calculated using an investment or loan’s principal balance. This is the amount that you invested or borrowed initially.

The following formula can be used to calculate simple interest: S.I. = P x R x T. where P = Principal,  R = Rate of interest in % per year, and T = Time. The interest rate is expressed in percentage r%. It should be written as r/100 or as a decimal.

Principal: This is the principal amount initially borrowed or invested. P denotes the principal.

Rate: The rate at which the principal amount of an investment is paid to someone is called the rate. It can amounts such as 5%, 10% or 15%. The symbol R denotes the rate of interest.

Time: The duration that the principal amount is placed with someone is called time. T denotes time.

Amount: A person who takes out a loan from the bank must repay the principal and the interest. This is known as Amount.

Simple Interest Example

You get a loan of \$10,000 from the bank at a rate of 6%. How much would the simple interest be for a loan amount of \$10,000? Calculate the simple interest for the amounts borrowed over 1 year.

Solution:

Principal Amount = \$10,000, Interest Rate = 6% = 6/100 or .06

Simple Interest

1 Year S.I = 10,000 x 6/100 x1= 600

Simple interest has its limitations

This simple interest calculation is a basic way to look at interest. This is a simple  way to calculate interest. Your interest, whether you are paying it or earning may be calculated using more complicated methods.  For example, other costs may be added to a loan beyond interest. They may be included in your lender’s interest rate.

You can be affected by interest in many areas of your financial life.  So be sure to understand simple interest and all the ways that interest may be calculated.

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