What is Simple Interest?
Simple interest is a method of calculating interest where the interest amount is based solely on the principal sum, the interest rate, and the time period. Unlike compound interest, simple interest does not add previously earned interest to the principal for future interest calculations.
When to Use Simple Interest Calculator
A simple interest calculator is useful in the following scenarios:
- Calculating interest on short-term loans or investments
- Determining the total amount to be repaid on a fixed-rate loan
- Planning personal finances when dealing with simple interest-based financial products
How to Calculate Simple Interest
The formula for calculating simple interest is:
Simple Interest = (Principal × Rate × Time) / 100
Where:
- Principal: The initial amount of money (loan or investment)
- Rate: The interest rate per time period (in percent)
- Time: The time period (typically in years)
To calculate the total amount to be repaid or received:
Total Amount = Principal + Simple Interest
Simple Interest Examples
Example 1: Calculating Interest on a Loan
Calculate the simple interest and total amount to be repaid on a loan of $5,000 with an interest rate of 8% for 3 years.
| Variable | Value |
|---|---|
| Principal | $5,000 |
| Rate | 8% |
| Time | 3 years |
| Simple Interest | $1,200 |
| Total Amount | $6,200 |
Example 2: Calculating Interest on a Savings Account
Calculate the simple interest earned on a savings account with an initial deposit of $10,000 at an annual interest rate of 2.5% after 2 years.
| Variable | Value |
|---|---|
| Principal | $10,000 |
| Rate | 2.5% |
| Time | 2 years |
| Simple Interest | $500 |
| Total Amount | $10,500 |
Example 3: Calculating Interest for a Short-Term Investment
Calculate the simple interest and final amount for a 6-month investment of $2,500 with an annual interest rate of 6%.
| Variable | Value |
|---|---|
| Principal | $2,500 |
| Rate | 6% |
| Time | 0.5 years (6 months) |
| Simple Interest | $75 |
| Total Amount | $2,575 |
Simple Interest Rate Comparison
| Interest Rate | Interest Earned on $1,000 (1 year) | Interest Earned on $1,000 (5 years) |
|---|---|---|
| 1% | $10 | $50 |
| 3% | $30 | $150 |
| 5% | $50 | $250 |
| 7% | $70 | $350 |
| 10% | $100 | $500 |