Simple interest is a method of calculating interest where the interest is charged only on the original principal amount, not on any accumulated interest. It is a fixed percentage of the principal amount, calculated over a specific period of time at a consistent rate.
Definition and Concept
Simple interest applies only to the principal, meaning the amount borrowed or invested does not change over time for interest calculation. Unlike compound interest, where interest is earned on both the principal and previously earned interest, simple interest remains constant throughout the entire period.
Formula
The most common formula to calculate simple interest is:
SI=P×R×T100SI=\frac{P\times R\times T}{100}SI=100P×R×T
Where:
- SISISI = Simple Interest
- PPP = Principal amount (initial sum of money)
- RRR = Annual interest rate (percentage)
- TTT = Time the money is invested or borrowed for, usually in years
Usage
Simple interest is typically used for short-term loans and investments such as car loans, some mortgages, and education loans. It is beneficial for borrowers as the interest cost does not compound, often resulting in lower interest paid compared to compound interest loans over time.
Example
If a loan of $18,000 has an annual simple interest rate of 6% for 3 years:
SI=18000×6100×3=3240SI=18000\times \frac{6}{100}\times 3=3240SI=18000×1006×3=3240
The total amount to be repaid would be the principal plus interest: $18,000 + $3,240 = $21,240.
This makes simple interest calculation straightforward and easy to understand.
