Simple Interest

What is interest?

Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan. There are two basic types of interest: simple and compound.

What is simple interest?

Simple interest is interest calculated on the principal portion of a loan or the original contribution to a savings account. Simple interest does not compound, meaning that an account holder will only gain interest on the principal, and a borrower will never have to pay interest on interest already accrued.

Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent.

Simple Interest Formula


I = PRT

Where:

  • P = Principal Amount (the amount of money saved or borrowed)
  • I = Interest Amount the money paid out when the money is saved or borrowed, it is the fee for using or saving the money)
  • R = Rate of Interest (usually written as percent but must be converted to a decimal to be used in calculations)
  • T = Time Period usually in years

Notes: Base formula, written as I = PRT or I = P × R × T where rate R and time T should be in the same time units such as months or years.

Different Versions of the Same Formula


What is being calculated determines how the formula is used.

  • Calculate Interest, solve for I
    • I = PRT
  • Calculate Principal Amount, solve for P
    • P = I / RT
  • Calculate rate of interest in decimal, solve for r
    • R = I / PT
  • Calculate rate of interest as a decimal
    • R = R /100
  • Calculate time, solve for t
    • T = I / PR

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