All You Need To Know About Simple Interest-banks and money-banksandmoney.com

All You Need To Know About Simple Interest


All You Need To Know About Simple Interest
Simple interest can be described as one of the fundamental financial calculations. You may have been introduced to the calculation before, but here we will show you how to calculate simple interest. Simple interest is often referred to as the price of borrowing.

In other words, what you must pay for a loan facility. However, simple interest is also utilized for investment. You will also learn that simple interest is utilized in many real-life transactions.

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How Do You Calculate Simple Interest?

The simple interest rate formula is pretty straight forward. If you are worried by equations, no need to worry this is an easy one.

It goes as follows:

I= (P × R × T)/100

A= P + I

P stands for Principal.
The principal describes the amount being borrowed if you are taking out a loan or the amount being invested if the interest is being applied to an investment.

R stands for the rate% per annum (or per year).

T stands for time.
Time in the simple interest formula is usually expressed in years/

I stands for simple interest in the equation.

A represents the amount that you would pay in total, if you took a loan or the amount that you would have all together if you made an investment.

“In order to understand how to calculate simple interest, we should look at an example”

In order to understand how to calculate simple interest, we should look at an example.
In our example, these are the assigned values:

P = £2000

R = 4%

T = 10 years

I = (2000 X 4 X 10)/ 100

I = £800

A = £2000 +£800

A= £2800

So, the amount (£2800) would either be the total amount owed or your initial investment plus the interest that you earned.

How do you calculate simple interest for monthly payments?

If you take a loan of any kind, you will most likely have monthly loan installments to pay. The simple interest formula calculates interest per annum.

In order to calculate a monthly payment, you need to make an adjustment to the interest rate.


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For example, the interest rate in our example in 4%. First, you need to convert 4% to its decimal equivalent. The interest rate as a decimal is 0.04. Then you have to divide that number by 12. As you may have guessed 12 is used since there are 12 months in a year.

0.04/12 = 0.0033

In order to find the monthly interest, you then have to multiply the principal by the monthly interest rate.

£2000 x 0.0033 = £6.60 per month

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Who Benefits The Most From Simple Interest?

Now that you know how to calculate simple interest, a fitting question is: For whom is simple interest most advantageous? You may have noticed that in finance, you are either the lender or the borrower. The lender would be the financial institution that is providing the loan facility and the borrower would be the person seeking to secure a loan. Simple interest holds the most benefits for the borrower.

Simple interest keeps how much you would pay generally lower and as the amount begins to decrease so does the interest.

When Can Simple Interest Work Against You?

When you are investing, simple interest is not the best option. When it is compared to compound interest, your investment will not grow as fast as it would with compound interest.

What is amortization?

This a term that you may come across when you are learning about simple interest. It essentially means the process of ascribing part of a loan payment to the principal amount of the loan. This process facilitates the decrease in the interest to be paid, as the principal amount is paid off.

What types of financial transactions use simple interest?

There are several ways that the simple interest is utilized that you may have encountered. Let’s explore a few:

Car loans- Simple interest is used for car loan payments. Car loans utilize amortization in their calculations. So, a portion (usually the greater part) of your loan payment is assigned to your principal amount and the rest to the interest that you are accruing.

Retail loans- If you wish to buy something in a department store on terms, your interest will be calculated using the simple interest rate formula. This facility is usually used for high-end items like a refrigerator or a washing machine. These loans are commonly for less than a year and work out better for you as the customer if you pay a portion of the loan every month.

Certificate of Deposits or CDs- Some CDs offer a straightforward investment with simple interest. You deposit a sum of money and it remains untouched for a fixed term. At the end of the term, you are able to get back your principal and the interest that was accrued.

Does simple interest bring any special benefits?

Yes, there is one benefit that requires special mention. Often simple interest loans have special discount offers attached to them. They are often called “early bird discounts “or “early payment discounts”.

If you pay off your loan earlier than the allotted term, you may be offered anywhere between 0.3% and 0.5% discount on your interest payments.

Should I use simple interest calculators?

There are several sites online that offer you free simple interest calculators that you can use to get an idea of what kind of interest you may pay on a loan. Or alternately if you are making an investment. However, you should wait for the figures from your banker, financial institution, or retailer. There may be charges that you may have to pay that you are aware of that have to be considered when calculating your monthly loan installments in particular.

So, while online simple interest calculators may be accurate regarding the interest. Numbers do not lie. You may not have all the information for your specific scenario.

Now that you know how to calculate simple interest, you may be more comfortable to explore your financial options.

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