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Simple Interest

Definition:

Simple interest is the interest calculated only on the original principal amount for a fixed period of time at a given rate.

What is Simple Interest?

Simple interest is a method of calculating interest in which the borrower pays interest only on the original principal amount, not on the interest already earned. It is widely used in short-term loans, personal loans, car loans, and some fixed deposits and mortgages.

Formula :

Simple Interest (SI) = (P × R × T) / 100

Where:

P = Principal amount
R = Rate of interest per annum
T = Time or tenure (in years)

Total Amount (A) = P + SI`

For eg, if you borrow Rs. 10,000 at 5% per annum for 2 years:

Step 1: Simple Interest = (10,000 x 5 x 2) /100 = Rs. 1,000

Step 2: Total Amount = 10,000 + 1,000 = Rs. 11,000

Simple Interest vs Compound Interest

Basis	Simple Interest	Compound Interest
Meaning	Interest is calculated only on the original principal amount	Interest is calculated on the principal and accumulated interest
Formula	SI = (P × R × T) / 100`	`A = P(1 + r/n)^(nt)
Interest Earned	Linear (same every year)	Increases every period
Growth Type	Slow and steady	Faster due to compounding
Principal Base	Fixed	Keeps increasing over time
Interest on Interest	Not applicable	Applicable
Commonly Used	Short-term loans	Long-term loans

FAQs

What is simple interest?

Simple interest is the interest calculated only on the original principal amount for a fixed period of time at a given rate.

How to calculate simple interest?

The simple interest calculation is = (P x R x T) /100

What is the difference between simple interest and compound interest?

Simple interest is calculated only on the original principal amount, whereas compound interest is calculated on the accumulated amount (principal + interest) over time.

What factors affect simple interest?

3 core mathematical factors determine simple interest: Principal (the initial amount borrowed or invested), Interest Rate (the percentage charged or earned per period), and Time (the duration of the loan or investment).