What is interest?
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
- 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