Simple Interest Formula

When you deposit money in a bank, the bank usually pays you for the use of your money. When you take out a loan from a bank, you have to pay the bank for the use of their money. In both cases, the money paid is called the interest.

The Simple Interest Formula is given by

Simple Interest = Principal × Interest Rate × Time

I = Prt

where

The Principal (P) is the amount of money deposited or borrowed.

The Interest Rate (r) is a percent of the principal earned or paid.

The Time (t) is the length of time the money is deposited or borrowed.

Example:

Sarah deposits $4,000 at a bank at an interest rate of 4.5% per year. How much interest will she earn at the end of 3 years?

Solution:

Simple Interest = 4,000 × 4.5% × 3 = 540

She earns $540 at the end of 3 years.

Example:

Wanda borrowed $3,000 from a bank at an interest rate of 12% per year for a 2-year period. How much interest does she have to pay the bank at the end of 2 years?

Solution :

Simple Interest = 3,000 × 12% × 2 = 720

She has to pay the bank $720 at the end of 2 years.

Example:

Raymond bought a car for $40, 000. He took a $20,000 loan from a bank at an interest rate of 15% per year for a 3-year period. What is the total amount (interest and loan) that he would have to pay the bank at the end of 3 years?

Solution :

Simple Interest = 20,000 × 13% × 3 = 7,800

At the end of 3 years, he would have to pay

$20,000 + $7,800 = $27,800

The following video shows how you can use the Simple Interest Formula.

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