Connect with us

## What is Simple Interest?

Whenever you borrow money from someone, a fixed amount is charged on the borrowed money based on the agreement made between two parties that is termed as the interest. Interest can also be defined as the accumulated money on account of a certificate of deposit. In simple words, SI (Simple Interest) is calculated on the original amount or principal value or the amount of loan. Another common term is Compound interest that is calculated on the principal amount and also accumulated on interest of previous periods.

### Simple Interest Different From Compound Interest

There is a lot of difference between two values when amount is paid on the compound or the simple basis. At the same time, compound interest works in your favor magically when it comes to investments and taken as advantageous factor for the wealth creation. At the same time, both simple interest and compound interest terms are used frequently in financial concepts that help you in making informed decisions.

### Simple Interest Formula

Here, the formula is given in mathematics for the calculation of Simple Interest –

$\ Simple\;Interest=\frac{Principal\times Time\times Rate}{100}$

If SI is charged at the five percent and it is continued for three consecutive years then the total amount payable in the end will be calculated as $1,500. In this way, SI paid annually is$500 and \$1500 over a period of three years. The same amount in the case of Compound Interest will be much higher because amount is paid on previous accumulated interests and so on.

#### Simple Interest Examples:

Example: Find the rate of Simple Interest, if the principal amount is Rs. 2000, time period is 1 year and rate is 10%.

Solution

As per formula we have: $\ Simple\;Interest=\frac{Principal\times Time\times Rate}{100}$

$\ =\frac{2000\times 1\times 10}{100}$

$\ =200$

So, the rate of simple interest is Rs. 200