How to Calculate Simple Interest

by Carter McBride

Simple interest is used when a company borrows money for a loan. Usually this amount will be on a monthly basis. The formula for simple interest is principal times the interest rate times the period. Usually period is expressed as a fraction of 12. For example, one month of interest will be 1/12. As an example, Firm A borrows $10,000 from bank. The bank charges 4 percent interest annually and Firm A needs to compute the interest to pay for the first month.

Determine the terms of the interest calculations. In the example, the terms are $10,000, 4 percent interest and one month.

Multiply the interest rate by the principal. In the example, $10,000 times 4 percent equals $400.

Multiply the number calculated in Step 2 by the term. In the example, $400 times 1/12 equals $33.34 of interest for the month.

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