Understanding Simple Interest

Let’s explore Simple Interest—a way to calculate the extra money earned or paid when borrowing or investing over a period of time. Think of it as a “thank you” payment for letting someone use your money, or a “thank you” charge when you borrow from a bank.

What is Simple Interest?

Simple Interest is a method of calculating interest where the amount of interest you earn or pay stays the same every year, based on the original amount (called the principal). It doesn’t change or “grow” over time like compound interest.

Formula for Simple Interest

To calculate Simple Interest, we use this formula:

$$Interest = Principal \times Rate \times Time$$

Where:

• $I$ is the interest earned or paid,
• $P$ is the principal amount (the initial amount of money),
• $R$ is the annual interest rate (in decimal form),
• $T$ is the time the money is invested or borrowed for, in years.

Using Simple Interest in Real Life

Simple interest calculations are commonly used for short-term loans or investments, such as personal loans, car loans, or savings accounts. It helps you understand how much extra money you'll earn on your savings or need to pay back on a loan.

 

How Simple Interest Works

Imagine you lend $\pounds 100$ to a friend at a rate of $5\%$ per year for $3$ years. Each year, your friend gives you back a little bit of “thank you” money—$5\%$ of $\pounds 100$. This $5\%$ is calculated only on the original amount $(\pounds 100)$ each year.