**Enter your interest rate as a whole number
i.e. 5% should be input as 5 and 6.5% as 6.5
Simple Interest Formula
I = Prt
P = Principal (money borrowed)
r = Rate (interest)
t = Years (time)
I = Interest Charged
What is Simple Interest and How to Calculate it
Understanding interest is an important concept in the world we live in. With our use of credit cards, taking out personal loans, car loans, mortgages, and even the banks we choose to do business with, all utilize interest rates and have an affect on our personal financial situations. This article will provide an overview of simple interest, how to calculate it, and offer an example that we may encounter, where interest can have an impact on us.
To begin with, what is simple interest? Simple interest is the amount of money that accumulates on an annual basis, based on how much is invested and the interest rate that is offered. Interest can accumulate on different terms, for example; daily, monthly, semi-annually, and annually, but the calculation gets a little more complex and is no longer considered "simple interest" (this would be considered compound interest and will be discussed in a future article, or visit Compound Interest Calculator to learn more). The financial institution usually chooses the term that is in their best interest and each method will have an affect (even if marginally) on how much interest accumulates. The formula to calculate how much interest accumulates is I = Prt. Described as follows:
P = Principal (Amount Invested)
r = Rate (interest)
t = time (the period of time the money will accumulate the interest; 6 months = .5, 1 year = 1)
I = Interest Accumulated
An example of a simple interest problem is as follows:
Mike needs to borrow money for a new car, but he isn't sure what loan is better. If he finances his car through one bank, the dealership will sell the car to him for $500 dollars less than sticker price, they will lend him $10,500 at 6% for 4 years. The other bank will lend him $11,000 for 4 years at 5%. Which loan is in his best interest (HA! no pun intended).
p = $10,500
r = .06
t = 4
The results show interest charged is: $2520 (don't forget to enter the % in decimal form... .06)
p = $11,000
r = .04
t = 4
The results show interest charged is: $2220.
If Mike goes with bank 1, he will pay $13020 (10,500 + 2,520), if he goes with bank 2 he will pay $13220 (11,000 + 2,220). Bank 1 is the better deal even though the interest rate is 2 points higher.