Simple Interest is an easy method used for calculating interest over a certain period of time. Most of the sectors such as banking, finance, automobile rely on this concept. Understanding the Concept of SI is essential to master the concepts of Finances. Go through the complete article to get acquainted with the details such as Simple Interest Definition, Formula, Procedure on How to find the Simple Interest with Examples.
What is Simple Interest?
Simple Interest is the process of determining the interest amount on the principal of money you have borrowed. Have you have ever borrowed money from someone? During the time of returning the money along with the principal amount, you will pay a sum of money as Interest. However, the amount you pay depends on the amount you have borrowed as well as on the time it is borrowed.
Simple Interest Formula
The Formula for Simple Interest if principal, rate of interest, time duration are given is as follows
SI = \(\frac {PTR}{100}\)
Where SI is the Simple Interest
R = Rate of Interest for which the Principal is borrowed(in Percentage)
T = Time Duration(Years)
To find the Amount we use the below formula
A = P + I
Where A is the total amount of money you return at the end of the time period for which it is borrowed.
How to Calculate the Simple Interest?
The Procedure to calculate the Simple Interest is as follows
- Firstly, observe the Parameters given such as Principal, Interest Rate, Time, etc.
- Later substitute the given inputs accordingly in the formula to find the Simple Interest i.e. SI = \(\frac {PTR}{100}\)
- Simplify as much as you can and the result obtained is the SI for the Particular Principal Borrowed over a certain period of time.
- If you want to determine the amount to be paid while returning then A = P+I
Simple Interest Formula for Months
Now, that you are aware of the formula for calculating the Simple Interest on a Yearly Basis let us see the procedure on how to calculate Interest for months.
Let us consider P is the Principal Amount, R is the Rate of Interest per Annum, n be the time in months then the formula to find the SI in months is as under
SI = \(\frac{P × n × R}{12 ×100}\)
Simple Interest Examples
Example 1.
Rihaan takes a loan of Rs 20000 from a bank for a period of 2 years. The rate of interest is 5% per annum. Find the interest and the amount he has to pay at the end of 2 years?
Solution:
From the given data we have
Principal(P) Rihan took as a loan = Rs. 20,000
Time Period for which Rihan has taken the loan = 2 Years
Rate of Interest for which the sum is borrowed = 5 %
We know the formula to calculate Simple Interest is given as SI = \(\frac {PTR}{100}\)
Substituting the input parameters in the formula we get the equation as under
SI = \(\frac {20,000 × 2 × 5}{100}\)
= \(\frac {2,00,000}{100}\)
= 2000
Simple Interest = Rs. 2000
Amount to be paid at the end of 2 Years = P+I
= Rs. 20,000+Rs. 2000
= Rs. 22,000
Therefore, the amount to be paid after 2 years for a sum borrowed of 20,000 at a 5% Interest Rate is Rs. 22,000/-
Example 2:
Mohan pays Rs 8000 as an amount on the sum of Rs 6000 that he had borrowed for 2 years. Find the rate of interest?
Solution:
Given
Amount Paid by Mohan = Rs. 8000
Principal or Sum of Money Borrowed by Mohan = Rs. 6000
We know A = P +I
8000 =6000+I
I = 2000
Time Duration for which Rihan borrowed the Sum = 2 Years
Rate of Interest =?
We know the formula for finding the Simple Interest is as follows
SI = \(\frac {PTR}{100}\)
Rearranging the formula of Simple Interest we can determine the rate of interest
2000=\(\frac {6000 × 2 × R}{100}\)
2000=\(\frac {12000R}{100}\)
2000=120R
R = \(\frac {2000}{120}\)
= 16.66%
Therefore, the Rate of Interest for which Mohan borrowed the sum of Rs. 6000 for 2 Years is 16.66%
FAQs on Simple Interest
1. What is Simple Interest?
Simple Interest is nothing but the Interest Calculated for the Principal of Money we have borrowed.
2. What is the formula for Simple Interest on a Yearly Basis?
The Formula for Simple Interest on a Yearly Basis is given by SI = \(\frac {PTR}{100}
3. What is the Simple Interest Formula on a Monthly Basis?
Formula to Calculate the SI on a monthly basis is given by SI = [latex]\frac{P × n × R}{12 ×100}\)
4. How to Calculate the Simple Interest?
Simple Interest can be found by simply multiplying the daily interest rate by the principal and the time elapsed between the payments.