What is Simple Interest Formula? Definition, Examples

Whenever you go for any sort of debt from the financial market, you end up with a rate of interest. This rate of interest is charged by the financial institutions for offering you a particular loan. Whatever the amount you borrow from the financial market, comes with a percentage of interest along with it. You cannot get an instant personal loan without the rate of interest. If you are not sure about the interest amount, you can always use an interest calculator with a simple formula to get the exact amount. The entire interest for the tenure is calculated among the month and you end up paying the monthly interest along with the EMI. Whenever you borrow it is important to go for a low rate of interest so that the depth is always an affordable one. If you know how to calculate the rate of interest it becomes easy to plan your finances according to the income. There are several ways by which you can get a lower rate of interest from the market. It completely depends upon the market condition and the individual factors that can help you get a good loan or an expensive one. If this is your first borrowing experience we will help you understand ‘what is the rate of interest and the formula to calculate itwith the help of some easy examples.

 

What is the simple interest rate?

A simple rate of interest is a small percentage of money charged on a personal loan. The simple interest is always charged on a short-term or small amount of personal loan. The more the amount the less will be the rate of interest on that particular loan amount. This rate of interest is not included in your repayment loan amount, but this is a part of an extra amount that you need to pay during the debt payment. It can be easily calculated using an EMI calculator with a very simple formula. The idea is to get low personal loan interest rates of simple interest so that the loan does not turn out to be an expensive one. There is no fixed rate on any type of personal loan and it is completely dependent on the factors of eligibility. If you are willing to take a loan from the financial market, you have to pay the simple interest that you are supposed to pay.

 

How to calculate the simple interest on a personal loan?

When you take a personal loan, it is always recommended to use a calculator to calculate the simple interest that you need to pay. It will help in understanding the interest amount monthly and will take care of your finances and help you manage the credit. It has a very simple formula and includes main three components. It includes the principal amount, rate of interest, and the tenure of the loan term. The principal is denoted as P, rate of interest as R, and tenure is denoted T. The formula is the principal amount plus rate of interest divided by the number of months in the loan term.

 

Formula: P*R*T: Simple Interest.

 

Examples of simple interest calculation

Let me show you an example of Sarah, who borrowed a principal amount of INR 2000 with an annual interest rate of 7% charged by the creditor or bank. The tenure of 1 year, before that the Interest should be converted into the decimal form, and for this, you need to divide 7/100 to get a decimal form of the interest rate charged on the principal amount. Let us show you the calculation of simple interest charged on Sarah’s principal and the information she provided.

 

P * R * T: Simple Interest

 

I = PRT = (2,000) (0.07) (1) = INR140.

 

Therefore, Sarah owes INR140 annual interest for her loan to the bank. After one year she has to pay around INR2140 total along with interest charged.

 

Another example of simple interest calculation

Sarah invested by opening a fixed amount of 500 rupees at the Savings interest rate of 6%, and the tenure of the fixed deposit is 1 Year. How to calculate the interest Sarah will receive at the end of tenure.

 

You can use the same formula, but again you need to convert the interest rate into decimal form first. You can do this by dividing 6/100, and you will be getting a 0.06 interest rate in decimal form.

 

P * R * T: Simple Interest

 

I = PRT = (500) (0.06) (1) = 30 rupees.

 

You see, 30 is the interest Sarah will receive at the end of the tenure of her fixed deposit.

If you go through the example, you will understand how the simple interest is being calculated, and you can easily do it for yourself using the formula. It becomes very easy to go ahead with the simple interest calculation

 

Wrapping up

Whenever you go for an instant personal loan always check the personal loan interest rates. It becomes very easy to keep your loan affordable and your EMI under control. You can easily get a low EMI and manage your finances well.

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