Simple Interest Formula (Table of Contents)
What is Simple Interest Formula?
Simple interest is the total amount of interest charged by the Lender to the Borrower based upon the Principle amount taken, tenure and rate of interest charged.
The formula for Simple Interest is –
Simple Interest = (Principal + Interest)
In other words, it can be written as
Where:
- A = Total Accrued Amount (Principal + Interest)
- P = Principal Amount
- I = Interest Amount
- r = Rate of Interest per year (r = R/100)
- R = Rate of Interest per year as a percent; R = r * 100
- t = Tenure (the time period in months or year)
Examples of Simple Interest Formula (With Excel Template)
Let’s take an example to understand the calculation of Simple Interest formula in a better manner.
Simple Interest Formula – Example #1
Ram has taken a loan of INR 1,00,000 with an interest rate of 8% per annum. Calculate the simple interest paid by Ram after 2 years and also find out the total amount (Simple Interest) paid by him at the end of two years.
Solution:
Simple Interest is calculated using the formula given below
A = P * (1 + r * t)
- Simple Interest = INR 100,000 * (1 + 8% * 2)
- Simple Interest = INR 100,000 * 1.16
- Simple Interest = INR 116,000
Therefore, Total amount paid by Ram to the lender is INR 116,000.
Simple Interest Formula – Example #2
ABC Ltd has taken a Long-term borrowing of INR 10,00,000 with an interest rate of 5.5% per annum from DCB Bank. Calculate the simple interest paid by ABC Ltd. after 6 years and also find out the total amount (Simple Interest) paid by the Company at the end of tenure.
Solution:
Simple Interest is calculated using the formula given below
A = P * (1 + r * t)
- Simple Interest = INR 1,000,000 * (1 + 5.5% * 6)
- Simple Interest = INR 1,000,000 * 1.33
- Simple Interest = INR 1,330,000
Therefore, Total amount paid by ABC Ltd to the lender is INR 1,330,000.
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Simple Interest Formula – Example #3
VIP Industries Ltd has taken a Long-term borrowing of INR 15,00,000 with an interest rate of 10% per annum from Yes Bank. Calculate the simple interest paid by ABC VIP Industries Ltd after 2 years and also find out the total amount (Simple Interest) paid by the Company at the end of tenure.
Solution:
Simple Interest is calculated using the formula given below
A = P * (1 + r * t)
- Simple Interest = INR 1,500,000 * (1 + 10% * 2)
- Simple Interest = INR 1,500,000 * 1.2
- Simple Interest = INR 1,800,000
Therefore, Total amount paid by VIP Industries Ltd to the lender is INR 1,800,000.
Explanation
Simple interest calculates the net amount which needs to be paid against the loan taken by the Borrower as Interest Cost which is pre-decided by the Lender and Borrower. A rate of interest is being charged on a yearly basis. If the borrower pays the entire amount within one year, then the amount would be charged on the basis of numbers of the month taken to repay the principal amount along with the rate of interest.
Relevance and Uses of Simple Interest Formula
- In case of any borrowed amount which is taken as a loan by an individual or any business house, there is an interest cost which is charged by the lender. Thus, for many lenders, it is a mode of revenue generation by deploying the principal amount. Interest cost is being paid by the borrower as a token of gratitude.
- Most of the banks and the Financial Institutions which are doing business within this sector generate their primary mode of Revenue through Interest income from the loan. In most of the cases, they borrow the principal amount from other institution or from other investors at a lower rate. The difference between the interest borrowed and interest received along with other operating expenses is taken at the profit earned by the Financial Institutions or the Banks.
- Simple interest is charged on both Short-term and Long-term Loans and depending on the nature of loan the rate of interest is charged accordingly. Generally, Short-term loan is taken for the tenure of less than one year and whereas Long term loan is taken for the tenure for more than one year. The rate of interest charged against short term loan bears a higher rate of interest compared to the long term loan. This is because any individual or Business house who takes long term loan, have a planning of capital expenditure through investment in assets. On the other hand, any short-term loan taken by the borrower is generally used for short term purpose like meeting up working capital, short term payments or due to short term payments.
- The interest charged is calculated as the rate of interest as applied on the principal amount which has been taken as a loan by the borrower from the lender. Sometimes there has been payment of only interest amount in case of long-term loans. In that case, the Interest is paid on a short term basis, and the principal amount remains the same unless any part of principle is being paid by the borrower. If the borrower pays a part of the principle, then the amount gets deducted from the principle and the interest would be charged on the rest amount. For example, a lender has taken a loan of INR 1,00,000 and pays quarterly installment at the end of each quarter. But at the end of six months, he pays off INR 30,000 along with the interest amount. Thus the next interest will be charged on INR (1,00,000 – 30,000) or on INR 70,000.
Simple Interest Formula Calculator
You can use the following Simple Interest Calculator
| P | |
| r | |
| t | |
| Simple Interest Formula = | |
| Simple Interest Formula = | P x (1 +r x t) |
| = | 0 x (1 +0 x 0) = 0 |
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