Simple Interest Practice

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Question 2

Calculate the interest rate of a $12000 loan when it's simple interest after 5 years is $3000.


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Select and check your answer...

A. 2%
B. 3%
C. 4%
D. 5%

Step by Step Solution

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    Step 1

    We can start with the simple interest formula:

    simple interest formula


    • I is the interest ($3000)
    • P is the principal ($12,000)
    • r is the interest rate per year (we will be calculating this)
    • t is the loan duration in years (5 years).
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    Step 2

    With I=3000, P=12,000 and t=5, we can substitute these values into the formula as shown:

    using the formula to find the interest rate
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    Step 3

    Now we have, 60000r = 3000. To find r, we have to divide both sides of the equation with 60000. This is shown below:

    interest rate, r is 0.05
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    Step 4

    Hence, we have, r = 0.05. It is better to express 0.05 in percent. To do so, we multiply 0.05 with 100% as shown:

    converting 0.05 to percent
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    Step 5

    The calculated interest rate is 5%. Clearly, the answer is D.