Simple Interest Definition

A Interest is the amount paid by someone who borrows a certain amount of money. This term is commonly used in
banks, loans, installments and investments. It is associated with percent, rate and the length of time, for which the
amount of money is borrowed.
There are many types of interest that can be applied. Simple interest is the simplest and most common type of
interest. This type of interest is applicable for a short-term duration, usually in days, weeks, months or even a few
years with not so large amounts of money.
Terms to remember
Borrower - the person who is receiving the amount and will be paying back the same amount with the
interest on the required date or time period.

Lender - the person who is giving the amount which has to be paid on the required date or time period.

Loan - temporary borrowing of money which is to be paid after a certain period of time.

Percent - one part in a hundred.

Ex. 10%

Factors of Simple Interest

There are only 3 common factors to be considered with regards to simple interest.
1. Principal
This is the amount of money being borrowed.This could be loaned from a bank or any loaning
establishment or borrowed from a person. This will be the basis of how much will be paid with the
additional compensation for borrowing.
2. Rate of Interest
This is the percent to be used to calculate the additional amount to be paid along with the principal.
Common rates of interest ranges from 1 to 10% but it can also be higher depending on the agreement
between the parties.
3. Time
This is the period from the beginning when the money was borrowed to the period that when the money
should be returned with the additional amount (interest). This can also be called a term or deadline. This
should properly and strictly be observed especially in huge amount of loans.
Kinds of Simple Interest
There are basically two kinds of simple interest: ordinary and exact. These two terms uses the same formula for
solving the simple interest but they differ on using the time.
Ordinary simple interest is a simple interest that uses 360 days as the equivalent number of days in a year. On
the other hand, Exact simple interest is a simple interest that uses exact number of days in a year which is 365 (or
366 for leap year).
These two kinds of simple interest are only applicable if the unit of time used is in days.
Example 1:On May 30, 2012 a businessman loans $15,000 in the bank for the expansion of his restaurant. It
was agreed that he will pay the amount with 6% rate of interest on August 10, 2012. What is the ordinary
simple interest to be paid?
$180
Explanation:
Principal amount is $15,000.
Rate of interest is 6%.
Counting the number of days from May 30 to August 10;
Note: Since May 30 is the beginning date, it is not included in counting.
May 31 1
June 1-30 30
July 1-31 31
August 1-10 10 Total 72 days
Converting days into years:
72 days x (1year360days)(1year360days) = 15years15years
Using the formula for solving the simple interest;
Interest = Principal x Rate x Time
Interest = $15,000 x 6% x 1515
Interest = $15,000 x 0.06 x 1515
Interest = $180
Therefore, the businessman will pay $180 interest.
Example 2:Louie borrowed $1800 from his aunt last December 25, 2010. He promised that he will pay his
aunt on February 14, 2011 at 8% interest. Find the exact simple interest to be paid by Louie.
$20.12
Explanation:
Principal amount is $1,800.
Rate of interest is 8%.
Counting the number of days from December 25 to February 14;
Dec 25-31 6
Jan 1-31 31
Feb 1-14 14
Total 51 days
Converting days into years:
51 days x (1year365days)(1year365days) = 51365years51365years
Using the formula for solving the simple interest;
Interest = Principal x Rate x Time
Interest = $1,800 x 8% x 5136551365
Interest = $1,800 x 0.08 x 5136551365
Interest = $20.12
Therefore, the Louie will pay $20.12 interest.
Calculating Simple Interest
Computation for simple interest is very easy and convenient to do since it only involves direct multiplication of the
parameters. Below is the formula for getting the simple interest.
Interest = Principal x Rate x Time
Note: beginning date is not included in counting.
Example 1:A man borrowed $2000 from his colleague to buy a new computer. He agreed to pay the amount
with an interest rate of 5% for 1 year. What is the amount of interest that the man will pay?
$100
Explanation:
Principal amount is $2000.
Rate of interest is 5%.
Time to pay the principal with the interest is 1 year.
Using the formula for solving the interest;
Interest = Principal x Rate x Time
Interest = $2000 x 5% x 1
Interest = $2000 x 0.05 x 1
Interest = $100
Therefore, the man will pay $100 interest.
Example 2:A factory loaned $400,000 from a bank in order to improve the automation system of its process.
The factory needs to pay the bank in 4 years with 10% interest. Find the interest to be paid.
$160,000
Explanation:
Principal amount is $400,000.
Rate of interest is 10%.
Time to pay the principal with the interest is 4 years.
Using the formula for solving the interest;
Interest = Principal x Rate x Time
Interest = $400,000 x 10% x 4
Interest = $400,000 x 0.1 x 4
Interest = $160,000
Therefore, the factory will pay $160,000 as interest.

Example 3:Jenny lends $300 to her friend who needs to pay the balance for her matriculation.Her friend
promised to pay her the amount with 12% interest in 3 months. How much will be the interest?
 $9
Explanation:
Principal amount is $300.
Rate of interest is 12%.
Time to pay the principal with the interest is 3 months.
Converting months into years;
33 months x (1 year12 months )=(1 year12 months )=(1/4 years)`
Using the formula for solving the interest;
Interest = Principal x Rate x Time
Interest = $300$300 X 12%12% X 1414
Interest = $300$300 X 0.120.12 X 1414
Interest = $9
Therefore, Jenny's friend will pay $9 interest.
Calculating Total Amount to Pay
Interest is just the additional amount to be paid on the sum of money loaned or borrowed. The main amount to be
paid is the principal amount. Interest is added to compensate the duration that the money was not used by the
lender. The total amount to be paid by the borrower to the lender is called future amount. Below is the formula for
solving the future amount.
FA=P+IFA=P+I
where,
FA means Future Amount
P means Principal
I means Interest
The future amount should be always greater than the principal. Their difference is always the interest. Since we
already know the formula to calculate the interest, we can substitute that formula with the formula above.
Future Amount = Principal + Interest
Since Interest = Principal x Rate x Time;
Future Amount = Principal + (Principal x Rate x Time)
Factoring out the Principal;
Future Amount = Principal x [1 + (Rate x Time)]
Thus, the formula for solving the future amount can also be written as
FAFA = PP x [1+(RxT)][1+(RxT)]
where,
FA means Future Amount
P means Principal
T means Time
R means Rate

Take note that since the formula for solving interest is also applied in the formula above, time is also in years and
ordinary and exact simple interest can still be used.
Example 1:

Find the total amount to be paid if the principal is $1,200 and the interest is $150.
$1350
Explanation:
The principal amount is $1,200.
The interest is $150.
Using the formula for solving the future amount;
Future Amount = Principal + Interest
Future Amount = $1,200 + $150
Future Amount = $1,350
Therefore, the total amount to be paid is $1,350.
Example 2:

An employee loans $800 from the labor union and promised to pay the amount in 1 year. How much will he need to

pay after 1 year if the interest rate is 15%?

$920
Explanation:
Principal amount is $800.
Rate of interest is 15%.
Time to pay the principal with the interest is 1 year.
Using the formula for solving the future amount;
Future Amount = Principal x [1 + (Rate x Time)]
Future Amount = $800 x [1 + (15% x 1)]
Future Amount = $800 x [1 + (0.15 x 1)]
Future Amount = $800 x (1 + 0.15)
Future Amount = $800 x 1.15
Future Amount = $920
Therefore, the employee must pay $920 in 1 year.
Calculating the Time
Formulas used for solving the interest use years as the unit of time. It should be observed to have consistent units
of time in order to avoid miscalculations. It should be noted that the rate should be in decimal form before using it to
the formula.
Here are the scenarios to be considered for solving the rate of interest:

1. Principal, rate and interest are given

Steps:
1. Divide the interest by the product of the principal and rate of interest.
2. Unit of time is in years.
We know that,
Interest=P⋅Rate⋅TimeInterest=P⋅Rate⋅Time
where P is Principal
So,
Time=IP⋅RateTime=IP⋅Rate
where,
P is Principal
I is Interest
2. Future amount, rate and principal are given
Steps:
1. Divide the future amount by the principal.
2. Subtract 1 from the quotient.
3. Divide the difference by the rate of interest.
4. Unit of time is in years.
We know that,
FutureAmount=P⋅[1+Rate⋅Time]FutureAmount=P⋅[1+Rate⋅Time]
FutureAmountP=1+Rate⋅TimeFutureAmountP=1+Rate⋅Time
FutureAmountP−1=Rate⋅TimeFutureAmountP-1=Rate⋅Time
Time=FutureAmountP−1RTime=FutureAmountP-1R
where
P is Principal
R is Rate
3. Future amount, time and interest are given
Steps:
1. Subtract the future amount by the interest. The result is the principal.
2. Divide the interest by the product of the principal and rate of interest.
3. Unit of time is in years.
We know that,
Interest=Principal*Rate*Time
Time=Interest/(Rate*Principal)
As,
P=FutureAmount−InterestP=FutureAmount-Interest
Hence,
Time=IRate⋅(FutureAmount−I)Time=IRate⋅(FutureAmount-I)
where
I is Interest
Note: The formula for solving the time is similar with the formula for solving the rate of interest. Just
interchange the terms.
Example 1:

Alex lent Alice $300. Alice paid Alex with an interest of $15. If the rate of interest was 15%, after how many months

did Alice pay Alex?

4
Explanation:
Principal amount is $300.
Interest is $15.
Rate of interest is 15%.
Using the formula for solving the time;
Time=IP⋅RateTime=IP⋅Rate
where
P is Principal
I is Interest
Time=15300⋅0.15Time=15300⋅0.15
Time=13yearsTime=13years
Converting years into months;
13Years⋅(12months1year)=4months13Years⋅(12months1year)=4months
Therefore, Alice paid Alex after 4 months.
Example 2:An organization loaned $14,000 from a bank at 9% interest. They will pay a total of $20,300within
the agreed date of payment. How long will the organization need to pay the amount?
5 years
Explanation:
Principal amount is $14,000.
Future amount is $20,300.
Rate of interest is 9%.
Using the formula for solving the time;
Time=FutureAmountP−1RateTime=FutureAmountP-1Rate
Time=20,30014000−10.09Time=20,30014000-10.09
Time=1.45−10.09Time=1.45-10.09
Time=0.450.09Time=0.450.09
Time=5yearsTime=5years
Therefore, the organization will pay the amount after 5 years.
Example 3:Steve withdrew $3,220 from a bank after he invested his money at 7.5% interest. If he receives an
interest of $420, for how long the investmentwas made?
2 years
Explanation:
Future amount is $3,220.
Interest is $420
The rate of interest is 7.5%.
Using the formula for solving the rate of interest;
Time=InterestRate⋅(FutureAmount−Interest)Time=InterestRate⋅(FutureAmount-Interest)
Time=4200.075⋅(3220−420)Time=4200.075⋅(3220-420)
Time=4200.075⋅2800Time=4200.075⋅2800
Time=420210Time=420210
Time=2yearsTime=2years
Therefore, the amount was invested for 2 years.
Simple Interest Principle
Computations for principal are applied for planning purposes. This is more of a futuristic point of view. If someone
expects to earn a certain amount from investment or to pay for a loan or debt, thinking of what amount to invest or
borrow will give the investor or borrower the idea to start in order to achieve the amount expected to earn or pay.
Remember that the interest is the product of the principal, rate of interest and time. Therefore, dividing the interest
by the product of the interest rate and time will yield the principal.
P=IRate⋅TimeP=IRate⋅Time
where,
P means Principal
I means Interest
Also, the future amount is the sum of the principal and the interest. Therefore, the principal is just the difference
between the future amount and the interest.
P = Future Amount - Interest
If only the future amount, time and interest rate are given, we can use the following formula to calculate the
principall.
P=FutureAmount1+(Rate⋅Time)P=FutureAmount1+(Rate⋅Time)
where,
P means Principal
Note: The unit of time used is in years.
Example 1:Find the principal invested at 4% for 8 months if the interest is $20.
$750
Explanation:
Interest is $20.
Rate of interest is 4%.
The amount is invested for 8 months.
Converting months into years;
8monthsX1year12months=23years8monthsX1year12months=23years
Using the formula for solving the principal;
Principal =InterestRatexTime=InterestRatexTime
Principal =200.04x23=200.04x23
Principal =200.083=200.083
Principal =$750=$750
Therefore, the principal amount to be invested is $750.
Example 2:A man paid his friend $424 on the money he borrowed. If there is an interest of $24, how much
money did the man borrow?
$400
Explanation:
Future amount is $424.
Interest is $24.
Using the formula for solving the principal;
Principal = Future Amount - Interest
Principal = $424 - $24
Principal = $400
Therefore, the man borrowed $400 from his friend.
Example 3:A rich man wants to earn $1 million in 10 years. What amount should he invest in the bank if the
interest rate is 2.5%?
$800,000
Explanation:
Future amount is $1,000,000.
Rate of interest is 2.5%.
Time of investment is 10 years.
Using the formula for solving the principal;
Principal =FutureAmount1+(RatexTime)=FutureAmount1+(RatexTime)
Principal = $1,000,0001+(0.025x10)$1,000,0001+(0.025x10)
Principal = $1,000,0001+0.25$1,000,0001+0.25
Principal = $1,000,0001.25$1,000,0001.25
Principal = $800,000$800,000
Therefore, the rich man should have an initial investment of $800,000.