Simple Interest Calculator Help

Formula:

i = p * r * t
Interest = Principal * Rate * Time

• Interest - The amount of money earned on principal
• Principal -
  • In savings: The initial investment
  • In Loans: The amount borrowed
• Rate - The interest rate
• Time - Amount of time to gain interest on principal

Simple Interest is most commonly used in savings and in short term loans.

If you are investing your money, ideally you want compound interest, because you get more interest. If you want a long term loan, such as a mortgage, ideally you want simple interest. But usually it doesn't work this way because banks and lenders want to make as much money as they can.

When somebody gets a loan they are charged interest. Interest is the price of money. When the loan is paid back the principal and interest are paid back. Simple interest loans are usually used when money is borrowed for a short amount of time, and can sometimes be paid back all at once.

Example 1:
Albert opens a savings account earning 8 % simple interest. His initial investment is 10,000. After 5 years how much will his bank account be worth?

Let's start with our equation:
i = p * r * t
i = x
p = 10,000
r = 0.08
t = 5
x = $10,000 * 0.08 * 5
x = $4,000
interest = $4,000
So over the 5 year period Albert has made $4,000 on this investment. And at this point, his balance will be $14,000.

Example 2:
Randy Loans his friend Bob $15,000 at 10% interest. The loan term is for 2 years and will be paid back at the end of the term.

How much interest is Randy making?
i = p * r * t
i = x
p = 15,000
r = 0.10
t = 2
x = $15,000 * 0.10 * 2
x = $3,000
interest = 3000
Over the two years, Randy will make a total of $3,000.
Now what if Bob wanted to pay it off over a 2 year period making monthly payments?
First Bob will have to pay back the Principal + Interest. We know from our previous question that the interest is $3,000 and the Principal is 15,000. Bob will have to pay back both the principal and interest.
$15,000 + $3,000 = $18,000.
So at the end of the 5 year period Bob will have to pay back $18,000. But Bob wants to pay back the loan monthly. How do we go ahead with this? Well there are 12 months in a year. Bob is paying this back over 2 years which is 24 months. So we divide the amount he will have to pay back by 24 months!
$18,000 / 24 = $750

Beginning the month he receives the Principal, $15,000, He will have to make 24 payments of $750.

That wasn't so hard was it!!

If Bob wants a lower monthly payment, he can extend the duration of the loan. So instead of paying it back in 2 years, he can reduce the amount of payments by making it 5 years. Try that problem yourself and check your answer on our Simple Interest Calculator.

This calculator is similar to Compound Interest Calculator, however the interest here does not compound.