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Simple Interest Formula

Simple Interest Calculation

Last Updated 31st Oct 2020

  • Simple interest is the method of calculating interest charged on the amount invested in a fixed deposit.
  • Understanding the Simple Interest Formula is essential to know about the basics of Finances.
  • Simple Interest is calculated on the principal amount on a daily/monthly/annual basis.
  • Principal Amount remains constant during the entire tenure on Simple Interest.
  • The formula for calculating Simple Interest is P x r x t ÷ 100, where P=Principal Amount, Rate of Interest & T= Time.
  • With a Simple Interest Calculator, you can calculate the interest without any error by saving time and efforts.
Simple Interest Calculator
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What is the Simple Interest Formula and its concept?

Calculating the amount that you need to pay or receive after a certain period based on the interest is vital. Simple Interest Formula is the easiest method of calculating interest on the principal amount and works in the following situations.

  • When you have borrowed money: If you have taken money from the Bank or your friends and family, you need to pay extra payment of interest along with the borrowed amount. SI formula can help you to calculate the cost of borrowing in the form of Interest.
  • When you lend money: If you have given money to someone, then you can earn Interest Income in exchange for making money available to them. With the Simple Interest formula, you can get a clear picture of extra income in the form of Interest.
  • When you invest money: Individuals who have invested their surplus money in investment schemes such as Fixed Deposit, Recurring Deposits etc. also receive attractive interests on their investments and can calculate such Interest Income with Simple Interest.

Simple Interest Formula

  • You can calculate Interest on your loans and investments by using the following formula for calculating simple interest:

    SI= P x R x T ÷ 100,
    where P = Principal,
    R = Rate of Interest,
    T = Time Period of the Loan/deposit in years,
    SI= Simple Interest

    • If the time period of loan or investment is in months, then you can use the formula as mentioned below.
      Simple Interest= P x R x T ÷ (100 x 12)
    • To calculate the amount that you need to pay at the end of tenure or amount that you will receive at the end of the maturity period, you can use the below-mentioned formula.
      Total Amount Value = P x (1 + (r x t))

Simple Interest Calculator - Calculate Simple Interest Online

Simple Interest calculators help you to easily compute the total amount of funds you will be able to generate on maturity or the total amount that you need to pay at the end of tenure.

  • With the help of SI calculators you can do complex calculations without any error.
  • You can save time and efforts on calculations if you are using SI calculators.
  • Further, SI can be quickly computed irrespective of any unit or currency.

How to use SI Calculator?

You can easily calculate the Simple Interest using a calculator or by using mathematical formula. If you don't want to do the calculations yourself, then enter the principal, rate and time period and the result will be calculated within seconds. If you are using the mathematical formula, then the result can be calculated in following steps:

  • Firstly, multiply the principal P, interest in percentage R and tenure T in years.
  • For yearly interest, divide the result of P*R*T by 100.
  • To get the monthly interest, divide the Simple Interest by 12 for 1 year, 24 months for 2 years and so on.

Simple Interest Calculation in Deposits

To have a better understanding of how Simple Interest works, let's consider this example.

If you have invested ₹ 5,00,000 in a fixed deposit account for 5 years and FD rates on your deposit is 10%, then the interest earned on deposits as per SI formula would be as follows:

SI= 5,00,000 x 10 x 5 ÷ 100 = ₹ 2,50,000
Total Amount at the end of 5 years= ₹ 5,00,000 x (1 + (10 x 5))= ₹ 7,50,000.

Thus, you will receive an additional interest of ₹ 2.50 Lakh at the end of maturity period of 5 years. Further, the maturity amount of the Fixed Deposit will be ₹ 7.50 Lakh.

Simple Interest Calculation in Loans

Suppose you have borrowed ₹ 2 Lakh as personal loan from a Bank with simple interest for a tenure of 2 years. The interest rate on PL is 15%.

Simple Interest on Loan= 2,00,000 x 15 x 2 ÷ 100 = ₹ 60,000

Difference between Simple Interest and Compound Interest

The basic difference between Simple Interest and Compound Interest is mentioned in the table below:

Point of Difference Simple Interest Compound Interest
Meaning Simple Interest is calculated on the Principal Amount for the entire tenure Compounded Interest is calculated on Principal + Accumulated Interest periodically
Principal Amount Principal Amount remains constant on Simple Interest The Principal Amount on Compounded Interest keeps on changing during the tenure
Returns The returns on Simple Interest are less. Returns on Compound Interest are comparatively high
Purpose It is beneficial when you have borrowed money It is beneficial when you have deposited or invested your money
Calculation It is easy to calculate Simple Interest Calculation for Compound Interest is more complex than Simple Interest
Formula

Simple Interest=P×r×t

where:
P=Principal amount
r=Annual interest rate
t=Term of loan, in years

Compound Interest=P×(1+r)t-P
where:
P=Principal amount
r=Annual interest rate
t=Number of years

Other Investment Calculators

FAQs

What is the formula to calculate simple interest?

You can calculate Interest on your loans and investments by using the following formula for calculating simple interest:

Simple Interest= P x R x T ÷ 100, where P = Principal, R = Rate of Interest and T = Time Period of the Loan/Deposit in years.

What is Rate in Simple Interest?

The Rate in Simple Interest refers to Rate of Interest of Loans or Rate at which you have lent money to someone or invested your money in any investment scheme.

What is the principal formula?

If you already know the Interest amount and want to calculate the Principal of Loan/ Deposit you can rearrange the interest formula SI = PRT to calculate the principal amount. The formula for calculating Principal amount would be P = I / (RT) where Interest is Interest Amount, R is Rate of Interest and T is Time Period.

How do you calculate interest?

You can calculate Interest by using the manual method or by Interest Calculator by using Principal Amount of Investment/ Borrowed Money, Rate of Interest and Time Period of Deposits/Loan. The formula for calculating Simple Interest is P x R x T ÷ 100, where P = Principal, R = Rate of Interest and T = Time Period of the Loan/Deposit in years.


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