Understanding the Simple Interest Formula: Calculate Interest on Loans and Investments

simple interest formula

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The simple interest formula is used to calculate the amount of interest earned or paid on a loan or investment over a specific period of time. It is a straightforward formula that only takes into account the initial principal amount, the interest rate, and the time period.

The formula for simple interest is:

I = P * r * t

Where:
– I represents the interest earned or paid
– P represents the principal amount (the initial amount of money)
– r represents the interest rate (expressed as a decimal)
– t represents the time period in years

To use the formula, you need to substitute the values of P, r, and t into the equation and solve for I.

For example, let’s say you have invested $2,000 in a savings account with an interest rate of 4% per year for a period of 3 years. To calculate the interest earned, you would plug in the values into the formula:

I = 2000 * 0.04 * 3
I = 240

So, in this case, the interest earned on the investment would be $240.

It is important to note that the simple interest formula assumes that the interest is compounded annually, meaning it is only applied once at the end of each year. If the interest is compounded more frequently (e.g., quarterly or monthly), you would need to use a different formula to calculate the interest.

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