Calculating Simple Interest | A Step-by-Step Guide with Formula and Examples

simple interest formula

The simple interest formula is used to calculate the amount of interest earned or charged on a principal amount of money over a specified period of time

The simple interest formula is used to calculate the amount of interest earned or charged on a principal amount of money over a specified period of time. It is given by:

Simple Interest = Principle (P) × Rate (R) × Time (T)

Here’s a breakdown of the variables used in the formula:
– Principle (P): The initial amount of money or the loan amount involved in the transaction.
– Rate (R): The rate at which interest is applied, typically expressed as a percentage per time period.
– Time (T): The duration of the loan or the time period for which the interest is calculated, usually measured in years.

To calculate the simple interest, multiply the principle amount by the rate and the time period. The result will give you the interest earned or charged.

For example, let’s say you deposit $1,000 in a bank account that offers an annual interest rate of 5%. If you keep the money in the account for 3 years, you can calculate the simple interest as follows:

Simple Interest = $1,000 × 5% × 3 years
= $1,000 × 0.05 × 3
= $150

Therefore, the interest earned on your initial deposit of $1,000 over a period of 3 years would be $150.

It’s important to note that the simple interest formula assumes the interest is not compounded. In other words, the interest is only calculated based on the initial principal amount and does not consider any accumulated interest over time.

More Answers: