What will you learn in this article?
  • What is Simple Interest (SI)
  • Some important terms of SI
  • Some important formulae of SI
  • How to solve SI questions

What is Simple Interest?

Nothing in life comes for free- especially loans!

Whenever we borrow money from someone, we usually have to pay it back along with some additional amount. The money borrowed is known as the principal. And the additional amount one has to pay over the principal is called interest. There are multiple ways of calculating this interest, but the easiest one is simple interest.

In Simple Interest, the interest is charged on the initial amount borrowed. Hence, the interest component is equal in each period.

Important Terms

  1. Principal: The money borrowed is called principal
  2. Interest: Interest is the extra money you pay when you take a loan from someone.
  3. Rate: Rate is the percentage of principal charged by the lender for the use of their money
  4. Time: Time is the duration for which the money is loaned, and for which the simple interest is being calculated.

Important Formulae

Think about it. If you have to pay someone a loan for Rs. 1000, would it increase or decrease if the rate is increased? Would it increase or decrease if the time is increased? Would it increase or decrease if the principal amount is increased from Rs. 1000 to 2000?

Increase in all cases, right? Well, simple Interest is directly proportional to the principal borrowed and is equal in amount for each year. Here is the simple formula for it:

Simple interest = P×R%×T

Derived versions of the formula are:

Principal = SI/(RxT)

Rate= SI/(PxT)

Time = SI/(PxR)

Also, when we have to find our interest per cent:

Interest% = Interest/Principal×100=SI/P×100

Some Examples:


1. Neeha has taken a loan of Rs. 560 from a friend, for a period of a year. The friend will charge an interest rate of 5%. What is the total money that Neeha will owe her friend by the end of the year?

Solution:

As per the data provided,

P= Rs. 560, R= 5, T=1

Thus,

SI= P×R×T = Rs. 560 x 5 x 1= Rs. 2800

Neeha would owe her friend Rs. 2800 by the end of the year

2. Shivam deposited a certain amount of money in a Simple Interest bank scheme, which amounted to Rs.720 after 2 years and to Rs. 1020 after a further period of 5 years. What is initial money that he deposited? 

Solution:

In 5 years, the total money grew by Rs.300.  Since SI is equal in amount for each year, every year the bank must have added Rs. 300/5, i.e. Rs.60 to the account. 

Now for the first two years, the bank has added Rs. 60 x 2= Rs.120.
So the money deposited by Shivam = Rs.720 – 120 = Rs.600


Common Mistake

A lot of times we get so busy in calculating the simple interest, that in questions asking total amount due, we forget to add in the principal. Make sure you never ever do that!