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Simple Interest Definition, Formula, Examples, FAQs

In addition to the principal amount, the borrower also pays some additional money as an interest to the lender. The extra sum is paid according to an agreement between the borrower and the lender. The agreement is generally in the form of rate per unit of the principal borrowed. It is usually given in the form of a per cent of the principal per annum. The interest of \(₹100\) for \(1\) year is known as the rate per cent per annum.

  • Therefore, it becomes important to know the concept of simple interest and how to calculate simple interest.
  • Also, in old times, people used to pay rent in order to use a movie player on per day basis.
  • To find the time period, the day on which money is borrowed is not taken into account, but the day on which money has to be returned is counted.
  • These materials are prepared by experts in the subject, and the information is exact and reliable.
  • Interest is computed as a % of Principal & this % is called Rate of interest.

Simple interest is beneficial when you are borrowing money or taking a loan. To get the monthly interest, divide the Simple Interest by 12 for 1 year, 24 months for 2 years and so on. Therefore, Raju needs to repay a total of Rs. 22, 000/- after the end of 2 years.

Find the interest accumulated on the sum of at the end of 2 years and calculate the total amount. Where, Amount is equal to the total money paid back at the end of the time period for which the money was borrowed. Take, for example, an entrepreneur Mr Alex wishes to commence a business and so he approached a bank to raise a loan. The bank agreed to lend him an amount of Rs 50,000/- for 3 years. Now at the end of three years, Alex will have to return the money to the bank.

Simple Interest: Formula

Most personal loans, including student and auto loans, as well as home mortgages, fall into this category. Mohit pays Rs 9000 as an amount on the sum of Rs 7000 that he had borrowed for 2 years. The rate of interest is the interest on every $100 for a fixed time period. The principal is the amount that initially borrowed from the bank or invested. You can compare your different investments or borrowing option provided by several financial institutions.

Additionally, using the personal loan EMI calculator, you get the personal loan amortization schedule, which is a detailed table of periodic loan EMI payments. It provides the details of the share of interest expenses and principal amount in each EMI payment of the chosen loan tenure. In this way, you can effectively plan your EMIs and reduce the burden on your finances. Simple interest is an easy and basic method to calculate interest on money. In the simple interest method, interest always applies to the initial principal amount, with the interest of the same rate for every year. Before discussing the concept of simple interest, let’s first know the significance of a loan.

Difference Between Simple and Compound Interests

A quick and constant learner, Akhil can bring off any niche in demand with his expertise in simplifying the complex. Being a lifelong Michael Jordan fan, he hopes to achieve the dream of meeting his idol one day. Compound interest is accumulated throughout the tenure periodically and added to the original principal amount. Simple interest is the interest calculated on the original principal amount for the entire tenure.

  • A simple type of interest is advantageous to the borrower when compared to the lender as a borrower will be spending slightly less on a loan that is taken on S.I.
  • Students must go through the Exercise which is provided.
  • Both simple and compound interest are basic financial concepts you should know, irrespective of whether you want to borrow or invest.
  • Ram borrowed a sum of Rs 5000 for 2 years at the rate of 3% per annum.

But the simple interest calculation is an integral part of compound interest as the first interest in CI is calculated using the simple interest formula. Hence knowledge of simple interest is essential to solving compound interest problems. The concept of simple and compound interest is especially applicable to the world of banking and economics.

Time and Work Formula and Solved Problems

When we invest our money in any bank, the bank provides us interest on our amount. The interest applied by the banks is of many types one of them is simple interest. Simple interest is a method to calculate the amount of interest charged on a sum at a given rate and for a given period of time.

Is simple interest loan better?

Dollar-wise, you're typically better off with simple interest any time you borrow, as long as you make payments on time and in full every month, and compound interest any time you invest.

A 1,0000/- principal contribution saves interest and results in bigger principal payments the following year, then greater principal payments the year after that, and so on. The loan interest does not compound if the principal payments are not generally considered acceptable, as with an interest-only debt , or if the principal installments are equalized. Compounding can also be achieved by lowering interest rates, shortening the loan duration, or prepaying the principal.

Type 2: When the interest is compounded annually but rates are different for different years.

This will reinforce your critical thinking capacities just as your speed and effectiveness. Significant formulae, definitions, and conditions can be recorded in a note pad and checked through training consistently. Settle earlier year’s example papers and question papers inside a period limit. This will acquaint you with the paper plan and question style, just as assist you with improving your time usage capacities. Reexamine consistently to guarantee that you hold all you’ve learned for a more extended measure of time. Ram borrowed a sum of Rs 5000 for 2 years at the rate of 3% per annum.

simple interest definition

In the same way, if we borrow money from a bank, a finance team, or a moneylender, we will have to pay back an extra amount than the amount we borrowed. Simple Interest is a broad topic mixed with the compound interest what role of rbi is known as lender of last resort to check for their differences. Banks provide loans on compound interest rate because it fetches more interest on their principal in the same tenure. Nearly all financial institutions use the compound interest rate.

What is the power of compounding?

Let’s take an example of a loan that charges interest on a daily basis to understand it better. There is another type of interest calledcompound interest. Let’s see one simple example to understand the concept of simple interest. On the other hand, calculations become easy when banks apply simple interest methods. Simple interest is much useful when a customer wants a loan for a short period of time, for example, 1 month, 2 months, or 6 months. In this lesson, you will be introduced to the concept of borrowing money and the simple interest that is derived from borrowing.

What is simple & compound interest?

Definition. Simple Interest can be defined as the sum paid back for using the borrowed money, over a fixed period of time. Compound Interest can be defined as when the sum principal amount exceeds the due date for payment along with the rate of interest, for a period of time. Formula. S.I. = (P × T × R) ⁄ 100.

The cost is often borne by the one who borrows as per agreement from both the parties. The compound interest is the difference between the final amount and the original principal. As the remaining loan balance reduces every month, the interest to be paid also decreases. Q.1. A sum of \(₹800\) is lent for one year at the rate of \(18\%\) per annum.

Simple Interest for Months

For example, when a person takes a loan of Rs. 5000, at a rate of 10 p.a. For two years, the person’s interest for two years will be S.I. Amount is the total money paid back at the end of the time period for which it was borrowed. Simple Interest (S.I) is the method of calculating the interest amount for some principal amount of money.

simple interest definition

Also, the higher the duration of the investments, the greater will be the interest. Simple interest can be considered as two categories when the time is considered in terms of days. Ordinary simple interest is a SI that takes only 360 days as the equivalent number of days in a year. On the other hand, exact simple interest is a SI that takes exact days in 365 for a normal year or 366 for a leap year. Find the rate of interest and time if both are numerically equal. Simple interest is the interest paid only on the principal, whereas, compound interest is the interest paid on both principal and interest compounded in regular intervals.

In case of simple interest, there is no such thing as interest on interest. We may use simple interest in both investment and borrowing situations. With investment, you earn interest, but you must pay interest to the lender when you borrow money.

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