Simple Interest - Formula and examples

Simple Interest: 

 When a borrower takes money from a lender then the borrower has to pay some interest to the lender for using that money. If the interest does not get added to principal amount at the end of the payment term, then this kind of arrangement is called as simple Interest.

Terms associated with Simple Interest:

Principal              :                 The total Money borrowed.

Term                    :                 The Time period of calculation of interest. May be quarterly, 
                                                             half -yearly or yearly.

 Rate of interest :                  Rate of interest is the rate at the the money is lent.

 Amount                :                    Amount is the sum of principal and interest to be paid at the 
                                                             end of the term.  


Formula for calculating Simple Interest:

Simple  Interest    = (P x R x T) /100

Formula for calculating Amount:

Amount = Simple Interest + Principal

Few Solved Problems in Simple Interest:

Problem 1:  A sum of Money will double it self in 10 years at simple rate of interest. Find the rate of Interest? Solution:  It is given to us that a certain sum of money will double itself in 10 years. We have to find the rate at which it was lent. Let the principal be P The the Amount after 10 years would be 2P Using the formula for amount ,  we have,  Amount = SI + Principal  =>   2P = (PxRx10)/100 + P   ( dividing both LHS and RHS by P) =>     2 = R/10 + 1  =>     1 = R/10 =>      R = 10 % Thus, any kind of money lent at simple rate of interest of 10% will double itself in 10 years.

Problem 2:  The Simple interest earned on a certain sum of money in 5 years at 11 % per annum is Rs 330. Find The sum. Solution:  The equation for simple interest is : S.I. = (P x R x T)/100 Data given in the question, R = 14% per annum T = 5 years S.I. = 330 P =? Put all the data in the above equation, we get       330 = (P x 11 x 5)/100 => 330 = (Px11)/20 => P = (330 x 20)/11 = 30x20 = 600 Hence , a sum of Rs. 600 will earn a simple interest of 330 in 5 years at 11% rate of interest.

Problem 3:  If 600 amounts to 816 in 3 years at simple interest. If the rate of interest is increased by 3%, to how much would it amount to in the same time period? Solution:  The equation for simple interest is : S.I. = (P x R x T)/100 Data given in the question, R = ? T = 3 years S.I. =  816  - 600 = 216 P = 600 Put all the data in the above equation, we get         216 = (600 x R x3)/100 =>  216 = 6 x R x 3 =>      R =   216/18 =12 % Now, the question was if it is to be increased by 3% then what will be the amount in 3 years. Now again using the new value of rate of interest ( 12 + 3 = 15) to get simple interest: S.I. = (600x15x3)/100 = ( 6 x 15 x 3) = 270 And amount would have been = 600 + 270 = 870.