What is Simple Interest?
Simple interest (SI) is the rate at which you borrow or lend money. When you take out a loan, an extra amount of money is paid back to the lender when it is time to pay up. There are two types of interest: simple interest and compound interest.
Borrowing money from someone or something for a set period of time is referred to as the principal and how much extra one pays back constitutes interest.
To calculate the simple interest on a loan, you first multiply the principal by the number of periods and the interest rate. This gives you the amount of money to be paid along with an earnings figure.
In simple interest, you are only being charged for one periodic payment that includes both principal and interest payments, whereas in compound interest, each respective periodic payment contains only interest charges,
therefore allowing for one's credit balance to increase exponentially over time as opposed to having to pay this amount off after every period (which is necessary if using only a simple interest loan).
Make sure that you understand what type of loan suits your needs by learning about their pros and cons.
How can a Simple Interest Rate Calculator help you?
A simple interest rate calculator determines the amount of money one earns at any given point in time, when one decides to invest.
It is regarded as the best computing device which gives users information on how much profit they will earn over a specific period of time determined by their return on investment.
When one is calculating the repayment amount in terms of simple interest, one is aware that this type of interest includes the initial principal amount and further profits derived from it.
The significant number with regard to a simple interest calculator involves whether or not the simple interest has been defined. Furthermore, there are various benefits associated with making use of the calculator.
The SI calculator offers output by calculating both principals as well as interest.
Online simple interest calculator is mainly used for calculation for longer tenures as the manual mechanism increases the chances of mistakes.
An SI calculator provides simple insights into interest as well as into the increase in the capital invested.
Example of Simple Interest Calculation
Michael's father had borrowed $1,00 from the bank and the rate of interest was 5%. Calculate the simple interest if the amount is borrowed for 1 year. Similarly, calculate the simple interest if the amount is borrowed for 2,3, and 10 years.
Solution:
Principal Amount = $100
Rate of Interest = 5%
| Simple Interest |
1 Year | S.I = (100 ×5 × 1)/100 = 5 |
2 Years | S.I = (100 × 5 × 2)/100 = 10 |
3 Years | S.I = (100 ×5 × 3)/100 = 15 |
10 Years | S.I = (100 × 5 × 10)/100 = 50 |
Now, you can also prepare a table for the above questions and add the amount to be returned.
| Simple Interest | Amount |
1 Year | S.I = (100 ×5 × 1)/100 = 5 | A= 100 + 5 = 105 |
2 Years | S.I = (100 ×5 × 2)/100 = 10 | A= 100 + 10 = 110 |
3 Years | S.I = (100 × 5 × 3)/100 = 15 | A = 100 + 15 = 115 |
10 Years | S.I = (100 × 5 × 10)/100 = 50 | A = 100 + 50 = 150 |
Benefits of a Simple Interest Calculator
In certain situations, where manual methods are used to calculate simple interest, the borrower ends up paying higher interest than needed. The following are some concept notes that explain why this happens and how switching to an online calculator is advantageous, for example:
SI does not take any unit into account.
Users can save a lot of time while calculating interest rates by changing years in real-time.
An SI loan calculator also helps in determining the current value of your money.
How to Use a Simple Interest Calculator
An SI calculator helps find out the simple interest you have earned on any of your deposits. To use the simple interest calculator, you can follow these steps:
First, select the interest type as simple interest.
Enter the principal amount.
Enter the annual rate of interest.
Choose any duration in terms of days, weeks or years.
The SI interest calculator will show you the simple interest you have earned.
Simple interest might be the best and most straightforward way of calculating interest on a basic, minimum payment-to-be basis. Be forewarned - you should use the formula to pay interest on a loan taken out for the purchase of something.
This is because it’s best suited for financial transactions in which one is borrowing an amount of money with plans to eventually repay the borrowed funds plus any additional monies agreed upon.
The simple interest formula can help calculate what percentage of your borrowed funds will go towards paying off whatever costs you had incurred with the loan minus any original principal values that were originally borrowed.
Calculating income from a loan may sound simple, but if one has not kept up with interest calculations, he/she can be making a mistake. Fortunately for you, there are SI calculators - you might calculate the extra income amount as something called the interest income.
If a business was to deposit money into its bank account in some way via any RD or other form like SSY and such, that could also be used by people to calculate what FD amounts they will get back at times, no matter how small the deposit is.
Conclusion
Simple interest is a common yet important financial concept. A simple interest calculator can help you find the interest earned on an investment over time. The calculator's principal input involves the principal amount invested, the annual interest rate, and the number of years.
The principal amount is the amount invested, and the annual interest rate is the rate of interest that will be paid on that investment. The calculator's output is the interest earned over time.
If you have just learned about simple interest, hopefully, this blog has provided a simple explanation of the concept. Thank you for reading. We are always excited when our articles can provide useful information.
Frequently Asked Question
Q1. How can you calculate interest?
Ans. It is calculated by multiplying the principal, the rate of interest, and the time period.
The formula for calculating simple interest = (P*R*T)/100
Where, P = Principal
R = Rate of interest
T = Time period
Q2. Do interest rates on principal change over time in simple interest?
Ans. Simple interest is based on what's referred to as the principal of a loan or deposit. The term refers to the original amount of money borrowed.
Furthermore, simple interest doesn't compound, meaning a lender will only be paid interest on this initial amount and the borrower would never owe more than that in accumulated interest.
If a lender compounds their interest, then it means the borrower has to pay not only for the initial debt but for any amount accumulated, higher and higher rates over time!
Q3. How do compund interest calculators work?
Ans. The compound interest calculator computes the future value of money based on the principal amount and its rate of interest that is compounded over a designated period. The formula is:
A = P (1+rt)
P = Principal amount
R = Rate of interest
t = Number of years
A = Principle + interest
Interest = A – P.
Q4. What is the difference between SI and CI?
Ans. There are two main types of interest - simple interest and compound interest. Simple interest is calculated with a single rate that you apply to the principal amount over time.
Compound interest is more comprehensive and it takes into account every period of a deposit or loan, adding to previous periods' amounts as part of its total.
Even though compound interest can be much more beneficial for someone who has access to it, especially considering how large the number of common deposits today tends to be, many small lenders and investors prefer using simple interest because it allows them to see their earnings as a straightforward sum.
The other type of interest is, overall, considered strategic for bigger consumers because when you have several loans or investments that link up through compounding, your payoff grows significantly with time, if you have enough capital involved in any one type of transaction.