What is the Simple Interest with Formula and Example

Simple Interest Definition

Simple interest is that is paid or earned only on the original amount, or principal amount, that you borrowed.

The amount of simple interest is a function of three variables: the original amount borrowed, or principal; the interest rate per time period; and the number of time periods for which the principal is borrowed or lent.

Explanation with Easy Example

If you do not have an amount of money at the moment, but you need it at some urgency or some emergency, then what will you do? If you have a good friend, brother or any partner, you may borrowed from them, but suppose if you do not have any of them, you may go to Bank. You borrow an amount of money from Bank it charge interest over it. Why? Because banks earn from interest, suppose it is the fee they charge you for lending you money. In contrast to it, if you have more cash at hand, and you need to save it in bank, then bank will pay you interests or in simple words, you will earn some extra money on it.

It is rarely used in Loans, but those who use are auto loans and short-term loans. A handful of mortgages also use this calculation, most preferable the biweekly mortgage. It is because of the biweekly mortgage helps borrowers to pay their homes off quicker is that paying the enterest profit more frequently accelerates the payoff date.

It is also rare with savings accounts; most savings accounts use the compounding method to get more profit.

What is Time Value of Money?

What is the Simple Interest Formula

The Simple Interests formula for calculation is

SI = P i n

what is the simple interest formula

whereas,

SI = simplee interest in dollars

P = principal, or original amount borrowed (lent) at time period 0

i = interests rate per time period

n = number of time periods

Problems on Simple Interest

Assume that you deposit $100 in a savings account which paying you 5% simple interest and keep it there for 10 years. At the end of 10 years, what is the simple interest accumulated at the end of 10 years?

Solution:

Data

P = $100

i =  5%

n = 10 years

SI = ?

According to formula, put all the values on formula

SI = P i n

SI = 100 x 0.05 x 10 = $50 Ans.

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