Simple Interest Calculator
Understanding Simple Interest
Simple interest is a straightforward method of calculating the interest charge on a loan or the earnings on an investment. It's calculated only on the initial amount of money deposited or borrowed, known as the principal. This means that the interest earned or paid each period remains the same, unlike compound interest where interest is calculated on the principal plus any accumulated interest.
The formula for simple interest is:
Simple Interest (SI) = (P × R × T) / 100
Where:
- P is the Principal amount (the initial amount of money).
- R is the Annual Interest Rate (expressed as a percentage).
- T is the Time Period (in years).
The total amount accumulated at the end of the term is the principal plus the simple interest earned:
Total Amount = Principal + Simple Interest
Simple interest is commonly used for short-term loans, such as payday loans or certain types of bonds. It's easier to calculate and understand than compound interest, making it a popular choice for simpler financial scenarios.
Example Calculation:
Let's say you deposit $5,000 (Principal) into a savings account that offers an annual interest rate of 4% (Rate) for 5 years (Time).
Using the formula:
SI = (5000 × 4 × 5) / 100 = 1000
So, the simple interest earned over 5 years would be $1,000. The total amount in your savings account after 5 years would be $5,000 (Principal) + $1,000 (Simple Interest) = $6,000.