Simple Interest

Simple Interest is a method of calculating the interest charge on a loan or financial investment. It is determined by multiplying the principal amount (the initial sum of Money) by the Interest Rate per period and the number of periods the Money is borrowed or invested.

The formula for calculating simple interest is:

SI = P × r × t

Where:

  • SI = Simple Interest
  • P = Principal amount
  • r = Annual Interest Rate (in decimal)
  • t = Time (in years)

Examples:

  • If you invest $1,000 at an Interest Rate of 5% for 3 years, the simple interest earned would be:

    • SI = 1000 × 0.05 × 3 = $150

  • If you borrow $2,000 at an Interest Rate of 4% for 2 years, the simple interest paid would be:

    • SI = 2000 × 0.04 × 2 = $160

Cases:

  • Case 1: Short-term loans often use simple interest, making it easier to calculate payments.
  • Case 2: Simple interest is common in certain Savings Accounts where interest is calculated on the original deposit only.