Simple Interest

When you put money in a bank you may earn interest, and when you borrow money, you may pay interest. The amount of money is called the principal. Simple interest refers to the amount of money that is paid for a specific amount of time called the term.

To determine the simple interest, multiply the original principal by the interest rate by the number of time periods.

Formula: $I = p r t$ where $I$ is the interest earned, $p$ is the principal (money either invested or borrowed), $r$ is the annual interest rate written in decimal form, and $t$ is the time in years for which the interest is paid.

Example 1:

You invest $$ 200$ at $8 %$ simple interest for $6$ years. How much interest have you earned at the end of that time?

$I = p r t$

$I = 200 (.08) (6) = $ 96$

Example 2:

You borrowed $$ 10, 000$ for $3$ years at $5 %$ simple interest. How much interest did you pay on the loan?

$I = p r t$

$I = (10000) (.05) (3) = $ 1500$

Example 3:

You deposit $$ 2500$ in the bank. The money earns $4 %$ simple interest per year. If you withdraw all your money and close the account after $18$ months, how much money will you have?

Note that here, the annual interest rate is given, but we're asked about $18$ months ... that is, $1.5$ years.

$I = p r t$

$I = (2500) (.04) (1.5) = $ 150$

Also note that the problem asks about the total amount -- that is, the principal plus the interest. When you take all your money out of the account, you'll have $$ 2500 + $ 150 = $ 2650$ .

Simple Interest

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