Simple Interest Calculator

Definition of Simple Interest

Simple Interest is a method of calculating the interest charge on a loan or the interest earned on an investment. The interest is computed only on the principal amount, or on that portion of the principal amount that remains unpaid.

Formula for Simple Interest

The formula to calculate simple interest is:

\[ \text{Simple Interest} (SI) = P \times R \times T \]

Where:

– \( P \) is the Principal amount (the initial sum of money)
– \( R \) is the Rate of Interest per period (expressed as a decimal or percentage)
– \( T \) is the Time the money is invested or borrowed for (in years)

Example

Let’s consider an example to calculate the simple interest.

Example Problem:

Suppose you invest \$1,000 in a savings account that pays an annual interest rate of 5% for 3 years. What is the simple interest earned?

Given:

– Principal (P) = \$1,000
– Rate of Interest (R) = 5% = 0.05
– Time (T) = 3 years

Using the formula:

\[ \text{SI} = P \times R \times T \]
\[ \text{SI} = 1000 \times 0.05 \times 3 \]

Calculation:

\[ \text{SI} = 1000 \times 0.05 = 50 \]
\[ \text{SI} = 50 \times 3 = 150 \]

Simple Interest Earned:

The simple interest earned over 3 years is \$150.

Real-Life Application

Simple interest is commonly used in various real-life financial situations, including loans, savings accounts, and investments. Here’s how simple interest works in these contexts:

1. Loans

When you borrow money, simple interest is often used to determine the interest you’ll pay on the principal amount.

Example: Personal Loan

• Principal (P): $5,000
• Annual Interest Rate (R): 10%
• Loan Term (T): 3 years

Using the simple interest formula:
\[ SI = P \times R \times T \]
\[ SI = 5000 \times 0.10 \times 3 \]
\[ SI = 500 \times 3 \]
\[ SI = 1500 \]

You would pay $1,500 in interest over the 3-year loan term.

2. Savings Accounts

Banks often use simple interest to calculate the interest earned on savings accounts.

Example: Savings Account

• Principal (P): $2,000
• Annual Interest Rate (R): 2%
• Time (T): 5 years

\[ SI = P \times R \times T \]
\[ SI = 2000 \times 0.02 \times 5 \]
\[ SI = 40 \times 5 \]
\[ SI = 200 \]

You would earn $200 in interest over 5 years.

3. Investments

Simple interest can also be applied to short-term investments where interest is calculated on the original principal.

Example: Short-term Bond

• Principal (P): $10,000
• Annual Interest Rate (R): 3%
• Investment Period (T): 2 years

Using the simple interest formula: 

\[ SI = P \times R \times T \]
\[ SI = 10000 \times 0.03 \times 2 \]
\[ SI = 300 \times 2 \]
\[ SI = 600 \]

You would earn $600 in interest over the 2-year period.