The concept of simple interest is used in many sectors such as banking, finance, personal loans, and so on. In this, the principal amount always remains the same.
For eg:- when you make a payment for a home loan, firstly it goes to the monthly interest and the remaining amount goes towards the principal amount.
In this blog, we will learn the definition, the simple interest formula, and how to calculate the simple interest with examples.
What is Simple Interest?
Simple Interest also known as S.I is the method of calculating the interest amount for some principal amount of money. In this, method interest always applies to the original principal amount, with the same rate of interest for every time cycle.
Suppose when we invest or simply deposit our money in any bank, the bank provides us interest on that amount. That interest is called simple interest.
Before going on the simple interest formula, let us understand some basic terms that are used when we are calculating interest.
Principal Amount
The principal amount is the amount that was initially borrowed from the bank or invested(deposited) in the bank.The principal is represented by P.
Rate
Rate can be defined as the rate of interest at which the principal amount is given to the borrower or investor for a certain period of time. The rate of interest can be 3%, 12%, 15%, etc. The rate of interest is represented by R.
Time
Time is the duration or time period for which the principal amount is given to a borrower or investor. Time is symbolized by T.
Amount
Let us understand this term with an example:-
When someone takes a loan from a bank or somewhere else, he/she has to return the principal amount borrowed plus the interest amount, and this total return is called the Amount.
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Simple Interest Formula
We can calculate simple interest using the given formula if the principal amount, rate of interest, and time periods are given.
The simple Interest Formula is specified as:
Simple interest = P*T*R/100
Where S.I is simple interest
- P = Principal amount
- R = Rate of interest (in percentage)
- T = time duration (in years)
If we want to calculate the total amount, we can calculate it using the given formula: –
Amount (A) = Principal (P) + Interest (I)
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Simple Interest Solved Examples:-
Example 1:
Ram takes a loan of Rs 20000 from a bank for a period of 2 years. The rate of interest is 10% per annum. Find the interest and the amount he has to pay at the end of a year.
Solution:
In this example, the principal amount = P = Rs 20000
Rate of interest per year = R = 10%
Time for which it is borrowed = T = 2 year
Thus,
simple interest for 2 years, SI = (P × R ×T) / 100
= (20000 × 10 ×2) / 100 = Rs 4000
Amount that Ram has to pay to the bank at the end of the 2 years
= Principal amount + Interest
= 20000 + 4000 = Rs 24,000
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Example 2:
Seetal’s father had borrowed Rs 5,000 from the bank and the rate of interest was 4%. What would the simple interest be if the amount is borrowed for 1 year?
Solution:
In this example, the principal amount = P = Rs 5000
Rate of interest per year = R = 4%
Time for which it is borrowed = T = 1 year
Thus,
simple interest for 1 year, SI = (P × R ×T) / 100
= (5000 × 4 ×1) / 100 = Rs 200
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Practice Questions for you:-
- Namita borrowed Rs 10,000 for 3 years at the rate of 3.5% per annum. Find the interest she has to pay at the end of 3 years.
- Shaam purchased a plot worth Rs48,0000, he has taken a loan from the bank at 10% per annum for a period of 4 years. How much does he have to pay after the period?
- Ritika pays Rs 12000 as an amount on the sum(principal amount)of Rs 8000 that she had borrowed for 3 years. Find the rate of interest.
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In this blog, we have learned what is simple interest, the formula to calculate simple interest, and solved examples of simple interest.
In the next module, we will learn the basics of compound interest, the formula to calculate compound interest and some solved examples of compound interest.
