How simple interest is calculated for loan? | Tirla Academy

In this article, we are going to talk about simple interests and how simple interest is calculated?

Simple interest is a key term if we discuss bank-related work such as home loan, car loan, education loan, etc.

But before we go ahead we need to discuss some terms which we used during finding the simple interest.

How simple interest is calculated?

Let's discuss the various definition-

PRINCIPAL

The principal is that money which we borrowed from the market or from any person to fulfill our needs.

Example of Principal

A man took a loan of 1,000 dollars (Principal) to purchase a new laptop.
- I pay 500 dollars interest on 10,000 dollars (Principal) of loan.

TIME

For how much duration we keep the borrowed money (Principal) is known as time.

Example of Time

- Mr Michael take a loan of 1000$ for 2 years (Time).
- He paid his loan money after 3.5 years (Time).

RATE

The quantity of percentage (Rate) of borrowed money is known as the rate of interest.
-If the rate is high so S.I. will be high.
-If the rate is low so S.I. will low.

Example of Rate

- Mrs Verma takes a loan at the rate of 8% p. a. for 5 years.
- They are paying simple interest on borrowed money at the rate of 9% p. a.

AMOUNT

The amount is the sum of principal(borrowed money) and simple interest(extra money).
Amount =  Principal + Interest

Example of Amount

- A man take a home loan of 20,000$(principal) and pay interest 2,000$(Simple Interest) for 2 years(Time). So the total cost of the home will be 22,000$(Amount).

SIMPLE INTEREST

Simple Interest is extra money that we pay on borrowed money.
Or
The extra charge which we pay for use of Principal(Borrowed money).

Simple Interest example

- A man is taking interest of 200 dollars (S.I.) on borrowed money.
- They purchase a house and pay interest of 10,000 dollars.

What is the formula to calculate simple interest?

1. Formula to find the yearly Simple Interest -

Simple Interest = (Principal×Rate×Time)÷(100)
Or
S.I. = (P×R×T)÷(100)

2. Formula to find the monthly Simple Interest -

Simple Interest = (Principal×Rate×Time)÷(12×100)
Or
S.I. = (P×R×T)÷(12×100)

3. Formula to find the daily Simple Interest -

Simple Interest = (Principal×Rate×Time)÷(365×100)
Or
S.I. = (P×R×T)÷(365×100)

How simple interest is calculated?

Simple Interest(S.I.) is calculated with the help of a S.I. formula. It is very helpful to find S.I. for car loans, home loans, monthly, daily, etc.

1.) How to calculate simple interest on a car loan?

Q-1 Find the simple interest if a man takes a loan of 10,000 dollars for their car for 2 years at the rate of 5% per annum.

Solve:-

Principal = 10,000 dollars, Time = 2 years, Rate = 5% p. a.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (10,000×5×2)÷100

S.I. = 100,000÷100

S.I. = 1000 dollars.

So, we get simple interest for their car loan = 1000 dollars.


Q-2 If John purchases a car of 100,000 dollars and after taking a loan if the bank takes the interest at the rate of 8% p. a. for 3 years. So find its simple interest.

Solve:-

Principal = 100,000 dollars, Time = 3 years, Rate = 8% p. a.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (100,000×8×3)÷100

S.I. = 2,400,000÷100

S.I. = 24,000 dollars.

Finally, we get simple interest for their car loan = 24,000 dollars.


2.) How simple interest is calculated on a home loan?

Q-1 If Donald takes a home loan for their house at the rate of 9% per annum. Calculate their interest for 3 years. If he gets 20,000 dollars for their loan.

Solve:-

Principal = 20,000 dollars, Time = 3 years, Rate = 9% p. a.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (20,000×9×3)÷100

S.I. = 540,000÷100

S.I. = 5,400 dollars.

Donald will pay 5,400 dollars as interest for their home for three years.


Q-2 Bank issue a loan of 2,000,000 dollars for the new bungalow of Mrs Sophia. How much interest she will pay for 5 years if the bank takes 10% as the rate of interest per annum.

Solve:-

Principal = 2,000,000 dollars, Time = 5 years, Rate = 10%.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (2,000,000×10×5)÷100

S.I. = 100,000,000÷100

S.I. = 1,000,000 dollars.

Sophia will pay 1,000,000$ on their home loan.


3.) How to calculate simple interest per annum?

Q-1 35,000 dollars is invested at a 5 % rate per annum. Find the interest at the end of one year.

Solve:-

Principal = 35,000 dollars, Time = 1 year, Rate = 5% per annum.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (35,000×5×1)÷100

S.I. = 175,000/100

S.I. = 1,750 dollars.

Simple interest at the end of the year = 1,750 dollars.


Q-2 James takes a loan of 500,000 dollars at 15% per year as a rate of interest. Find the interest for a year.

Solve:-

Principal = 500,000 dollars, Time = 1 year, Rate = 15% p. a.

Simple Interest = (Principal×Rate×Time)÷100

S.I. = (500,000×15×1)÷100

S.I. = 7,500,000÷100

S.I. = 75,000 dollars.

James will pay interest for a year = 75,000 dollars.


4.) How to calculate simple interest per month?

For monthly simple interest, we will divide by 12 to the formula of S.I.
Simple Interest = (Principal×Rate×Time)÷(12×100)

Let's take some example to understand it-

Q-1 Rita purchases an electric scooter of cost 12,000 dollars for her father. He takes a loan for it at the rate of 7% for 1 year. So find its simple interest for a month.  

Solve:-

Principal = 12,000 dollars, Time = 1 year, Rate = 7% p. a.

Simple Interest = (Principal×Rate×Time)÷(12×100)

S.I. = (12,000×7×1)÷(12×100)

S.I. = 84,000/1200

S.I. = 70 dollars.

The monthly simple interest for their loan will be 70 dollars.


Q-2 Cost of a laptop is 8,000 dollars. So find its monthly interest at the of 4% per annum for 1 year.

Solve:-

Principal = 8,000 dollars, Time = 1 year, Rate = 4% p. a.

Simple Interest = (Principal×Rate×Time)÷(12×100)

S.I. = (8,000×4×1)÷(12×100)

S.I. = 32,000÷1200

S.I. = 27 dollars (approx).

Finally, we get simple interest for a month = 27 dollars.


5.) How to calculate simple interest per day?

To find daily simple interest, we will divide by 365 to the formula of S.I.
Simple Interest = (Principal×Rate×Time)÷(365×100)

Let's take some example to understand it-

Q-1 If John purchases a car of 100,000 dollars and after taking a loan if the bank takes the interest at the rate of 8% per year. So find its daily simple interest.

Solve:-

Principal = 100,000 dollars, Time = 3 years, Rate = 8% p. a.

Simple Interest = (Principal×Rate×Time)÷(365×100)

S.I. = (100,000×8×3)÷(365×100)

S.I. = 2,400,000÷(365×100)

S.I. = 24,000÷365

S.I. = 66 dollars (approx)

So, John will give the 66 dollars per day.


Q-2 What will be the S.I. for a day if the cost of the refrigerator is 3,000 dollars. And a man pays interest at the rate of 5% for 1 year.

Solve:-

Principal = 3,000 dollars, Time = 1 year, Rate = 5%.

Simple Interest = (Principal×Rate×Time)÷(365×100)

S.I. = (3,000×5×1)÷(365×100)

S.I. = 15,000÷(365×100)

S.I. = 150÷365

S.I. = 0.41 dollar (approx)

Per day interest will be 0.41 dollars.


In this article we discussed various questions to find the simple interest.

I hope now you understand well how simple interest is calculated for loan yearly, monthly or daily.


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