Simple Interest

Simple interest is a  fixed percentage of the amount borrowed or invested.

What is Simple Interest?

Simple interest is a percentage of a given amount that is multiplied by the number of time periods. This interest is added to the principle amount and serves as payment for the use of money or a return on the money invested.

The total amount of the loan or investment will therefore equal the principal plus interest.


The Simple Interest Formula

I= \frac {PrT}{100}

I= Interest amount
P= Principal amount
r= Interest rate
T= Time- the number of time periods.

Transposed Simple Interest Formula

This formula can be transposed to find each of the terms. This can be found by making the amount you want to find the subject of the equation.

P= \frac {100\times I}{r\times T} r= \frac {100\times I}{P\times T} T= \frac {100\times I}{P\times r}

Watch Out For

  • The rate (r) should always be in the same unit as time (T). For example, if you have T=12 months, r should also be in months- \frac {r}{12}
  • There are different types of interest accounts- bonds, debentures and term deposits are all simple interest accounts
  • Simple Interest is also called Flat Rate interest. The above formula is the same regardless of whether it is a simple interest rate or a flat interest rate.

See also

Compound Interest
Effective Interest Rate