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Understand the Concept of Simple Interest in Detail

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Right from the start, we all are taught many of the concepts of mathematics that will be very helpful in different sectors in the future, from numbers to the knowledge about the profit and loss concept. Even in the secondary classes, the students are also told about the idea of Simple interest. It is an easy way to calculate the different interest on the loan amount. Other banks and financial institutions are taking the help of this concept to calculate the loan repayment amount in a certain period.

Simple interest is one of the methods of calculating the right amount of interest on a specific principal amount of money. Suppose you have borrowed particular cash from your friends or relatives. It is easy to calculate the interest on the money that you have borrowed from them. The calculation through this method makes it easy to calculate the interest on the money borrowed.

No person can borrow for free from any person. They need to pay interest from the borrowed money at the time of repayment. Interest is something that is paid the expense of using a specific principal amount for a certain period. There is a simple formula that will help in calculating the interest.

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Concept of Simple Interest

The simple interest formula is:

SI = (P * R* T) / 100

Here, SI stands for Simple Interest, P = principal, R = interest rate (in percentage) and T = time duration (in years). Further, the amount is to be calculated, and the formula for it is:

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A = P + I

Here, A = amount, P = Principal, I = Interest.

So the amount is the money that the person needs to pay back at the end of the period.

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For example, Mr A has borrowed Rs. 40000 from his friend for two years at an interest rate of 4% p.a. Calculate simple interest and amount.

Solution: P= Rs. 40000, T= 2 years, R= 4% p.a.

SI= (P * R* T) / 100

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= (40000 * 2 * 4) /100

= Rs. 3200

Now Amount = Principal + Interest

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= Rs. 40000 + Rs. 3200

= Rs. 43200

Even there is a formula to calculate the Simple interest for months. Sometimes there might be some people that want money for some months. So the formula for Simple Interest for n months is:

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SI for n months = (P * R* n) / 100 * 12

For example, Mrs Brown has borrowed Rs. 10000 from her cousin for ten months at the interest rate of 3% p.a. Calculate simple interest and amount.

Solution: P= Rs. 10000, T= 10 months, R= 3% p.a.

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SI= (P * R* n) / 100 * 12

= (10000 * 3 * 10) /100 * 12

= Rs. 250

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Now Amount = Principal + Interest

= Rs. 10000 + Rs. 250

= Rs. 10250

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Some people think that Simple interest and compound interest are the same, but actually, they are not. There is a significant difference between the two which is stated as follows:

  • In simple interest, the amount is calculated at the end of the period, but the amount is calculated after every year in the case of the compound interest. And the amount of the current year becomes the principal amount of the following year.
  • If any bank or institution follows the simple interest formula, the calculated interest will be less than that in the compound interest. As in CI, the principal keeps on changing every year though the compound interest formula is the same as SI.

It is a concept that should be known by every person so that the things related to the interest charging might be evident among them. To get more knowledge about simple interests, it will be great to get yourself enrolled with Cuemath. It is an online platform that provides all the best knowledge about the different concepts of maths and coding. The experts will make things easier for the children to understand.

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OM Prakash
OM Prakash
OM Prakash is Our Author at Spot News 18. He Loves to Write Meaningful Contents for Our Audience. He Is very Passionated about his Work.

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