The term Simple Interest comes to the picture for all, and it occurs when someone takes some amount from any bank. When you borrow a certain amount of sum of money for a limited period and in return you have agreed with the lender to pay it back within the time frame along with interest amount. Apart from these, it too plays a role when you invest the sum of money in the savings account, and as a result, the account earns the interest from you.
You can explain the simple interest in a better manner in the form of a quick and easy method of calculating with the interest charge on loan. It is also determined by multiplying with all interest that is put by daily rate by the number of days that can elapse between the payments.
A Brief Overview of Simple Interest:
Simple interest is said to be the type of interest which can be applied to all amount that is borrowed or even invested anywhere. This process must be given some period for which the amount is taken or invested, and all these things must apply to the borrower without taking any past interest rates or any other conditions.
It is applied to the amount which is meant for short-term loans or even less than one year and is administered by the financial companies. It is like the ratio between the interest ratio and is expressed in the form of a percentage. It too plays an important role which comes in determining all the amount of interest on the loan or investment amount. So, the final amount that is charged to the borrower usually depends on the essential things which are explained in the latter part of the article.
About Simple Interest Formula:
When you borrow some amount of money from any place or invested anywhere, then the borrowed amount is termed as the Principal amount. When you take money from anywhere, it is a common sight that financial institutions start to apply some interest rate in the form of a percentage. This rate of interest is the extra amount that you need to pay apart from the principal amount. If you have taken the amount for a year, then the interest rate is given as the percentage per year rate or annual interest rate.
After all these things, then comes the loan period or its duration. It is like the time in which the principal amount is said to be borrowed or even invested. For all these things it is presented in years, and in most of the cases, it may last for some months or days. So, when you start to pay the simple interest loan to the lender, then the first payment goes towards the interest for the next month, and the remaining amount of money left goes to the principal amount. You too can calculate the interest amount easily by putting the formula for simple interest. The formula for simple interest is stated below:
S.I. = Principal x Rate x Time/ 100
Example for Simple Interest Formula:
To make you understand how the calculation is done if you go for the Simple interest, you need to go through the example that is mentioned below.
For example, if a customer borrows an amount of Rs 2000 from the Bank. The borrowed amount for that person has now become the principal amount. As the customer has taken the amount, a rate of interest is put on the amount, and a period is a fix. Let it the rate of interest be 7 percent and time is one year.
After the lender fixes all these things, so you need to put the formula and put all the values that are mentioned above. The final interest amount that you will get after solving is Rs 140. So, it means that, if you borrow Rs 2000 at 7 percent rate for one year, then you need to give Rs 140 as interest amount in addition to the principal amount at the end of the year. It means in the total amount you need to pay 2000 + 140 which is Rs 2140 to the lender after one year.
Hope you can understand all these interest amount calculation and can know how to deal with it in a better manner.
Points to Note when computing Simple Interest:
If you are thinking to calculate the simple interest formula, then you need to make sure that you can calculate the interest rate by keeping these things in mind.
- When you get the rate, it is in percentage form and to make it simple for an outing in formula convert it to the decimal form.
- If the interest rate is given to you in decimal form, then you need to make sure that that you bring it to the whole number. To do the same, you need to make sure that you multiply the interest rate by 100, and due to that, you can make it to the whole number.
- The Simple Interest equation is used mostly in the Banks for Savings Bank account and Term Deposits. In Bank, they calculate the interest rate on a quarterly basis.
- If you look at the returns of the computed Simple Interest, then it will always be less than the returns which are calculated under the Compound Interest.
- If you look at the Simple interest formula, then you can find that the interest rate is much higher in initial years and then it is reduced as the time passes.
- Usually, S.I. The formula is used to apply on the certificate of deposits, car loans, term deposits, and savings account deposits.
These are the details about the Simple interest. To calculate the interest, it is very simple when you put Simple interest formula but still if you have got any doubt or wants to know how they help and where they are applied then you can go through the above article. You can find all the details out there in a detailed manner.
Hey, this is Johny Sehgal. I am the owner and caretaker at Finance Jungle. I completed my education in BSC and now heading towards the digital marketing industry. I usually have interests in reading, playing games and watching movies. I also love to write content based on quality information. The main motive of mine is to provide the top and best quality information to my readers. Finance Jungle is the blog for the same.