What is Simple Interest Formula? Definition, Examples

When you go for a personal loan, there comes an extra charge attached to it. You have probably heard the term simple interest, which is charged for offering a loan. If you need funds and you apply for a loan, you need to pay a rate of interest for that. Along with the principal amount, there is also a rate of interest amount added in the monthly EMI. The idea is, the rate of interest is charged for offering you a sum of money when you need it. This rate has a formula and it is calculated based on it. Interest is something that you owe to the loan provider, and you need to give it along with your loan amount. Every penny that you borrow has an attached interest rate to it. The moment you borrow, the first thing you see is interest. For every personal loan provider, the personal loan interest rates are not the same. The calculating formula stands the same, but the rate is subject to variation. Various things are considered so that you get the best rate. Before you borrow, find out every detail about simple interest.

What is simple interest?

A simple interest loan is generally calculated for short-term loans. If you go for a loan that is below one year tenure, it will be calculated based on simple personal loan interest rate formula. You will find simple interest debt being offered by many loan products, like car loans and personal loans. In this type of loan, the interest is calculated as per the principal loan amount daily. The payments are then first applied to all the interest due, for the principal balance. If you want to know the rate of the simple interest, you will have to go for a simple formula that will give you accurate results.

The formula of simple interest

It is the most satisfactory situation. You need to understand that the amount you have borrowed is known as the principal and is generally denominate as “p”, Now the interest that is usually charged on every loan is designated as “r”, which usually means the annual interest rates. This gets calculated according to the duration of the loan or any kind of investment or sort of mortgage for a year or so. In most cases, you can find that it can be also seen in months or days. The tenure that you choose for your loan is denominated as “t.”

Now that you know the initials, it is time for the formula to come up. The formula of simple interest calculation is P*R*T: Simple Interest. If you follow this formula you will surely get the best rate of interest for your loan easily. It helps you to do the calculation easily and manage your finances accordingly.

Example of simple interest calculation

Taking an example it becomes very easy to understand how the calculation works. You will easily get hold of the calculation once you look for the example. Here the individual that is borrowing a loan is named Sarah. Now Sarah is in investing in a fixed deposit of amount 500$. The rate of interest for the fixed deposit investment is 6%. This is the rate and the tenure for the investment that she has chosen is 1 year. How can you calculate the simple interest that she will be receiving after she is done with the tenure of one year? What do you do now? It is very simple. All you need to do is, put all the details in the formula and then make the calculation. Using the formula of simple interest, you will do the calculation. First, you need to convert the rate of interest into a decimal from the first. How would you do that? You need to do it by dividing the 6/100 and then you will be getting the decimal 0.06 interest rate as in the decimal form. Now putting this in the simple formula you get

P * R * T: Simple Interest

I = p*r*t = (500) (0.06) (1) = $30.

The calculation that takes place in a simple interest is all about the formula that you use. It can be used to easily compute the interest that you owe or you have to give. Make sure when you are getting the rate of percentage interest, you convert it into decimal. This will help you get the decimal digits and then it is easy to apply as per the formula. Calculation of simple interest is easy and you get accurate results without any delay.

Wrapping up

When you are confused about how to get hold of a personal loan interest rate you can use this to get your result accurately. For all the personal loan calculations, you can go on and use the loan calculator.