Simple Interest: Simple Interest is the interest paid only on the principal amount borrowed. No interest is paid on the interest accrued during the term of the loan.
There are three components to calculate simple interest: principal, interest rate and time.
Formula for calculating simple interest:
I = Prt
Where,
I = interest
P = principal
r = interest rate (per year)
t = time (in years or fraction of a year)
Example:
Mr. X borrowed Rs. 10,000 from the bank to purchase a household item. He agreed to repay the amount in 8 months, plus simple interest at an interest
rate of 10% per annum (year).
If he repays the full amount of Rs. 10,000 in eight months, the interest would be:
P = Rs. 10,000 r = 0.10 (10% per year) t = 8/12 (this denotes fraction of a
year)
Applying the above formula, interest would be:
I = Rs. 10,000*(0.10)*(8/12) = Rs. 667.
This is the Simple Interest on the Rs. 10,000 loan taken by Mr. X for 8 months.
If he repays the amount of Rs. 10,000 in fifteen months, the only change is with time.
Therefore, his interest would be:
I = Rs. 10,000*(0.10)*(15/12) = Rs. 1,250
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