Simple Interest
Simple interest is a type of interest that is calculated only on the initial principal amount of a loan or investment, without considering any additional interest that may accumulate over time.
It is typically expressed as a percentage of the principal amount and is applied for a specific period of time. The formula used to calculate simple interest is given by
SI = P× R×T
Where,
- S.I. is Simple Interest,
- P is Principle Amount,
- R is Rate of Interest, and
- T is Time.
This formula calculates the interest earned or paid on the principal amount over a specific period. It’s called “simple” because it’s straightforward and doesn’t consider compounding interest, where interest is added to the principal amount and then earns interest itself over time.
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We can understand the concept of simple interest using an example.
Consider that you have Rs 500 as the principal amount of money and an interest rate of 5% per year is given to you by the bank.
Then at the end of 2 years, the principal interest is given by
S.I. = 500 × 2 × 5%
S.I. = 500 × 2 × 5/100 = 50
∴ S.I. = Rs. 50
Therefore the final amount of money after two years will be Rs 550.
Real-Life Applications of Simple Interest
Simple interest is a method of calculating interest on a loan or investment based solely on the initial amount of money, called the principal, and the rate of interest. It does not take into account any interest that accumulates on previously earned interest, which is known as compound interest.
In simple interest, the interest amount remains constant throughout the term of the loan or investment.
Simple Interest, or interest, is a very common term used in day-to-day life by ordinary people, as borrowing and lending money is prevalent in the modern world. Simple interest is less common today, as most financial tools use compound interest instead. However, there are various applications of simple interest, which we will discuss in this article.