How to Calculate Simple Interest

Lesson Objective

In this lesson, we will see some examples on how to calculate simple interest...

Study Tips

Tip #1

The formula for finding simple interest, I is given below:

Where:

P is the principal (the amount of money borrowed)
r is the interest rate (per year or per annum)
t is the loan duration in years.

The math videos below will show some examples on using this formula...

Math Video

Video on calculating for I when P, r and t (in year) are given...

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Video on calculating for r when I, P and t are given...

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Math Video Transcript

CALCULATE SIMPLE INTEREST TRANSCRIPT

PART 1
00:00:03.130
In this lesson, we will learn how to calculate simple interest, using some examples.

00:00:10.150
Consider a loan of $5000 with the interest rate of 3%, for 2 years. Calculate the simple interest.

00:00:20.170
Now, to calculate the interest, we can use the formula, I=Prt.

00:00:27.150
Now, since the principal is given as $5000, we can substitute P with 5000.

00:00:35.160
Similarly, since the interest rate is given as 3%, we can substitute r with 3%.

00:00:43.160
Here, note that, we must change 3% into a decimal, before using it for calculation.

00:00:51.170
To do so, we divide 3 with 100. This gives 0.03.

00:00:59.190
Let’s continue, since the loan duration is 2 years, we can substitute t with 2.

00:01:09.090
We can now calculate the interest.

00:01:12.170
0.03 multiply with 2 gives 0.06. 5000 multiply with 0.06, gives 300.

00:01:25.140
Hence, the interest I, is $300.

00:01:31.140
Alright, that is all for this example.


PART 2

00:00:03.230
Consider a loan of $3000, with the interest rate of 5%, for the duration of 6 months. Calculate simple interest.

00:00:15.150
Now, to calculate the interest, we can use the formula, I=Prt.

00:00:23.070
Since the principal is given as $3000, we can substitute P with 3000.

00:00:30.070
Similarly, since the interest is given as 5%, we can substitute r with 5%. Note that, we have to convert this 5% into a decimal.

00:00:43.160
To do so, we divide 5 with 100. This gives 0.05.

00:00:53.240
Next, the loan duration is given as 6 months. Hence, we can substitute t with 6 months.

00:01:03.220
Note that, since the loan duration is always in 'year'. We must convert 6 months into year.

00:01:11.220
To do so, since 1 year has 12 months, we divide 6 with 12.

00:01:18.030
This gives 0.5 year. Now, we can start calculating the interest.

00:01:27.030
0.05 multiply with 0.5, gives 0.025.

00:01:34.100
3000 multiply with 0.025, gives 75.

00:01:41.040
Therefore, the get the interest I = $75.

00:01:47.140
That is all for this example.


PART 3

00:00:03.020
Consider a loan with a principal of $2000, the loan duration is 4 years, and the interest after 4 years is $800. Find the loan's interest rate, r.

00:00:17.040
We start with the simple interest formula, I = Prt.

00:00:22.200
Since the interest is given as $800, we can substitute I with 800.

00:00:29.180
Similarly, since the principal is given as $2000, we can substitute P with 2000. Next, the loan duration is given as 4 years. Hence, we can substitute t, with 4.

00:00:47.010
We can simplify by multiplying 2000, with 4. This gives 8000.

00:00:55.030
Now we have, 8000r=800. Let's rewrite it here.

00:01:03.230
To find r, we need to remove 8000.

00:01:08.170
To do so, we divide both sides of the equation with 8000.

00:01:14.120
This gives, r equals to, 800/8000.  800 divided by, 8000 gives, 0.1.

00:01:27.120
Now, we have the interest rate as, r=0.1.

00:01:34.050
Now, rather than leaving the answer like this, it is better to change 0.1 to percent.


00:01:40.240
We can do so, by multiplying 0.1 with 100. This gives, 10%.

00:01:51.030
Hence, the interest rate for this loan is 10%.

00:01:56.240
That is all for this example.

--END OF CALCULATE SIMPLE INTEREST--

Practice Questions & More

Multiple Choice Questions (MCQ)

Now, let's try some MCQ questions to understand this lesson better.

You can start by going through the series of questions on calculate simple interest or pick your choice of question below.

Question 1 on the using the simple interest formula
Question 2 on using the maturity value formula

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