Table of Contents
Simple interest method
Definition
Under this method, the interest is charged only on the amount originally lent (Principle borrowed) to the borrower. Simple interest is usually charged on short-term borrowings.
Terms used in Simple Interest
Principle or Sum:– The money that is lent or borrowed.
Interest:– It is the money paid in addition to the Principle.
Rate:- It is the percentage of Principle paid as interest.
Time:- It is the duration for which the Principle is borrowed.
Simple interest formula
S.I = P x r x t
S.I = Simple interest
P = Principle/Borrowed amount
i/r = rate of interest
n/t = number of periods
Amount or Maturity value: It is the total money paid back at the end of the time period for which it was borrowed. It is given by-
Amount (A) = Principle (P) + Interest (I)
Example
Ali borrowed Rs 50,000 for 3 years at the rate of 3.5% per annum. Find the amount and simple interest accumulated at the end of 3 years.
Solution
P = Rs 50,000
R = 3.5%
T = 3 years
S.I = = Rs. 5250
Amount = 50,000 + 5,250 = Rs. 55,250