# Simple Interest

Simple Interest is similar to Daily Simple Interest except that with the latter, interest accrues daily and is added to your account balance. Also, while loan balances on simple interest debt are reduced on the payment due date, daily simple interest loan balances are reduced on the day payments are received.

## Simple Interest

For a short-term personal loan, a personal loan calculator can be a great way to determine in advance an interest rate that's within your means. For longer-term loans, this calculator may also be of help.

If you'd like to calculate a total value for principal and interest that will accrue over a particular period of time, use this slightly more involved simple interest formula: A = P(1 + rt). A = total accrued, P = the principal amount of money (e.g., to be invested), r = interest rate per period, t = number of periods.

Compound interest will always pay more after the first payment period. Suppose you borrow $10,000 at a 10% annual interest rate with the principal and interest due as a lump sum in three years. Using a simple interest calculation, 10% of the principal balance gets added to your repayment amount during each of the three years. That comes out to $1,000 per year, which totals $3,000 in interest over the life of the loan. At repayment, then, the amount due is $13,000. Now suppose you take out the same loan, with the same terms, but the interest is compounded annually. When the loan is due, instead of owing $13,000, you end up owing $13,310. While you may not consider $310 a huge difference, this example is only a three-year loan; compound interest piles up and becomes oppressive with longer loan terms.

For example, a student gets a loan to pay one year of college tuition. The original amount is $18,000. The loan's annual interest rate is 6%. The student gets a great job after graduation, cuts spending, and repays the loan over 3 years. How much interest will the student pay in total?

How much will the student pay, including the principal and all interest payments? Add the principal amount ($18,000) plus simple interest ($3,240) to find this. The student will repay $21,240 in total to borrow money for college.

With compound interest, borrowers must pay interest on the interest and the principal. But on the other hand, compound interest in a bank savings account could yield you more money and higher earnings long-term, as the bank "borrows" savings from you.

So, you apply to a bank for a loan at an interest rate of 5% per year. But this time, the interest is compounded annually. The entire loan amount and interest are payable after three years. What would be the total interest you pay?

It depends on whether you're saving or borrowing. Compound interest is better for you if you're saving money in an account or being repaid for a loan. However, if you're borrowing money, you'll pay less over time with simple interest.

Teens have the advantage of youth and time. The earlier you start saving money, the more money you can earn. Your interest earns interest with compound interest, meaning you earn more every compounding period. Keep adding to your savings to increase your earnings even more.

Use this simple interest calculator to find A, the Final Investment Value, using the simple interest formula: A = P(1 + rt) where P is the Principal amount of money to be invested at an Interest Rate R% per period for t Number of Time Periods. Where r is in decimal form; r=R/100; r and t are in the same units of time.

The Simple Interest Calculator calculates the interest and end balance based on the simple interest formula. Click the tabs to calculate the different parameters of the simple interest formula. In real life, most interest calculations involve compound Interest. To calculate compound interest, use the Interest Calculator.

Interest is the cost you pay to borrow money or the compensation you receive for lending money. You might pay interest on an auto loan or credit card, or receive interest on cash deposits in interest-bearing accounts, like savings accounts or certificates of deposit (CDs).

Simple interest is interest that is only calculated on the initial sum (the "principal") borrowed or deposited. Generally, simple interest is set as a fixed percentage for the duration of a loan. No matter how often simple interest is calculated, it only applies to this original principal amount. In other words, future interest payments won't be affected by previously accrued interest.

Under this formula, you can calculate simple interest taken over different frequencies, like daily or monthly. For instance, if you wanted to calculate monthly interest taken on a monthly basis, then you would input the monthly interest rate as "r" and multiply by the "n" number of periods.

Now that you know your total interest, you can use this value to determine your total loan repayment required. ($10,000 + $2,500 = $12,500.) You can also divide the value to determine how much interest you'd pay daily or monthly.

If you had a monthly rate of 5% and you'd like to calculate the interest for one year, your total interest would be $10,000 0.05 12 = $6,000. The total loan repayment required would be $10,000 + $6,000 = $16,000.

Simple interest works in your favor as a borrower, since you're only paying interest on the original balance. That contrasts with compound interest, where you also pay interest on any accumulated interest. You may see simple interest on short-term loans.

Compound interest is another method of assessing interest. Unlike simple interest, compound interest accrues interest on both an initial sum as well as any interest that accumulates and adds onto the loan. (In other words, on a compounding schedule, you pay interest not just on the original balance, but on interest, too.)

Over the long run, compound interest can cost you more as a borrower (or earn you more as an investor). Most credit cards and loans use compound interest. Savings accounts also offer compounding interest schedules. You can check with your bank on the compounding frequency of your accounts.

As a borrower, paying simple interest works in your favor, as you'll pay less over time. Conversely, earning compound interest means you'll net larger returns over time, be it on a loan, investment, or your regular savings account.

Now consider the same loan compounded monthly. Over five years, you'd repay a total of $12,833.59. That's $10,000 of your original principal, plus $2,833.59 in interest. Over time, the difference between a simple interest and compound interest loan builds up exponentially.

Buying Example Disclaimer. This example illustrates one application of the method. The results shown here and the results in your situation may differ. These differences occur for three reasons: (1) Laws vary from state to state, (2) the computer programs used by lenders differ, and (3) the contracts used by lenders differ. In the example, the monthly interest is calculated as 1/12 of the annual interest. Your finance agreement, even if it uses this method, may not work like the one in this example. The example addresses the rebating of interest only, not any other charges that may be included in the loan.

The Daily Simple Interest method is similar to the Simple Interest method except that interest is calculated on the actual balance each day. Payments are credited and the loan balance is reduced on the day the payment is received, rather than on the due date, as is done under the Simple Interest method. Daily Simple Interest loans have the same advantage as the Simple Interest loans by allowing principal amounts to be prepaid during the loan, thereby reducing the outstanding balance and the interest portion of subsequent payments if all subsequent payments are made on the due date. The term of the loan and total interest are reduced when additional principal payments are made if all subsequent payments are made on the due date. However, if the payments are made a few days after the due date each month, the interest paid will be higher than under the Simple Interest method (and higher than under the Constant Yield (Actuarial) method if no prepayments of principal are made). Amount financed $18,800.00 Term48 months APR 9.00% Monthly payment$467.84

If an additional $1,000 principal is paid at the end of the first month, the loan balance is reduced from $18,473.16 to $17,473.16. Month 2 interest charges will be based on this reduced balance, so more principal will be credited from each payment if all subsequent payments are made on the due date. If the remaining payments are made on time, the loan will be repaid in 45 months rather than 48 months because of the extra $1,000 principal payment in month 1. The total interest paid will be $3,224.84 instead of $3,656.32, a savings of $431.48 in interest. However, if no extra principal is paid and every payment is made 5 days after the due date, the total additional interest paid will be $30.38. The early termination balance at month 24 will be $27.91 higher than under the Simple Interest or Constant Yield (Actuarial) method but $26.90 less than under the Rule of 78 method.

Simple interest is a method to calculate the amount of interest charged on a sum at a given rate and for a given period of time. In simple interest, the principal amount is always the same, unlike compound interest where we add the interest to the principal to find the principal for the new principal for the next year.

In this lesson, you will be introduced to the concept of borrowing money and the simple interest that is derived from borrowing. You will also be introduced to terms such as principal, amount, rate of interest, and time period. Through these terms, you can calculate simple interest using the simple interest formula.

Simple interest is a method of interest that always applies to the original principal amount, with the same rate of interest for every time cycle. When we invest our money in any bank, the bank provides us interest on our amount. The interest applied by the banks is of many types and one of them is simple interest. Now, before going deeper into the concept of simple interest, let's first understand what is the meaning of a loan. 041b061a72