How to Calculate Simple Interest
Whenever money is lent from one party to another, the loan will have an interest rate. This interest is the amount of money that must eventually be paid back to the lender, in addition to the original amount lent (known as the principal). When dealing with simple interest, the amount that the borrower is responsible for is calculated by this original principal (denoted by the variable P) being multiplied by the interest rate (denoted by r, for rate), and then multiplied by the period of time that the principal earns interest (denoted by t). Altogether, the equation for calculating simple interest is I = P r t. <\displaystyle I=Prt.> 
Method One of Two:
Calculating Simple Interest Edit
Find interest owed with formula I = P r t <\displaystyle I=Prt> .
- I = <\displaystyle I=> Interest owed
- P = <\displaystyle P=> Principal, or the initial sum borrowed
- r = <\displaystyle r=> Interest rate written as a decimal
- t = <\displaystyle t=> Number of time periods since loan began
Find total amount owed. The borrower also has to pay back initial loan, so total amount owed is equal to I + P <\displaystyle I+P>. You can either add them together at the end, or combine them into one equation to get total amount A = P ( 1 + r t ) <\displaystyle A=P(1+rt)>.
Example A. A bank lends you $55,000 at a simple annual interest rate of 3%. How much interest do you owe ten years later?
- P = $ 55. 000 <\displaystyle P=\$55,000>
- r = 0.03 / year <\displaystyle r=0.03/<\text>>(To convert a percentage to a decimal, divide by 100. For example, if you’re given a rate of 3%, it becomes 3/100, or 0.03)
- t = 10 years <\displaystyle t=10\ <\text>>
- I = P r t = ( $ 55. 000 ) ( 0.03 / year ) ( 10 years ) = $ 16. 500 <\displaystyle I=Prt=(\$55,000)(0.03/<\text>)(10\ <\text>)=\$16,500>
- Total amount owed = $ 55. 000 + $ 16. 500 = $ 71. 500 <\displaystyle <\text>=\$55,000+\$16,500=\$71,500>
Method Two of Two:
Understanding Concepts Edit
Understand interest. Why does interest exist? The person lending money is giving up other uses for that money until the loan is repaid. The interest is supposed to make up for the fact that the lender could have spent that money in ways the brought in extra value. 
Pay attention to the time period for each loan. Interest accumulates over regularly-spaced periods of time. For annual interest the time periods are years, but the terms of the loan could use months, weeks, or days. The shorter the period of time, the more often interest gets added to the loan.
- This can make a huge difference. A loan with annual interest adds the interest rate ten times in ten years. A loan with monthly interest adds the same interest rate 120 times in ten years:
- 10 years × 12 months 1 year = 120 <\displaystyle 10\ <\text>\times <\frac <12\ <\text>><1\ <\text>>>=120>
Don’t forget the principal. When a loan is paid off, the borrower doesn’t only have to pay the interest — they must also pay back the principal that was borrowed. The sum of the interest generated plus the principal is also known as the “future value,” or the “maturity value” of the loan. 
Learn the difference between simple interest and compound interest. You’ve just calculated simple interest, in which you only pay interest on the principal you borrowed. Many credit cards and other loans, however, utilize compound interest, where the interest you owe gathers interest of its own. Compound interest can result in much higher interest over time than simple interest. Calculating compound interest requires a different formula. Here’s a side-by-side comparison of the two systems:
- You take a loan out for $100 at 30% simple interest. You’ll owe $30 interest after the first time period, $60 after the second, $90 after the third, and $120 after the fourth.
- You take out a second loan of $100 at 30% compound interest. You’ll owe $30 interest after the first time period, then $69, then $119.70, then $285.61.
- Multiple other factors can come into play when calculating more complex forms of interest, including credit risk and inflation.
Why is interest calculated in months and not in years?
Answered by Jasmine Tipping
- The money being lent may not necessarily take a year to pay back. If someone was lent say $300 even with an interest rate, it may only take months for them to pay it back. With interest calculated monthly, it can be more accurate, otherwise you would have a large amount of interest being paid on a small/large amount of money each year, giving a lump sum that someone couldn’t possibly pay within the time given by the bank or loaner.
What is compound interest?
Answered by wikiHow Contributor
- It is interest calculated on a principal which has been increased by previous interest payments. Essentially it’s “interest on interest.”
If I have $120 in my savings account and I get 0.25% interest for the first month, how much will I earn in interest?
Answered by Risto Mononen
- The savings are multiplied by 1.0025 every month. In a year it would make $120 x 1.0025 ^ 12. You didn’t specify the savings time though; replace 12 with the number months you are saving.
Is per annum interest simple or compounded?
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