Simple Interest
Interest earned or owed without compounding.
Formula
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Example
$1000 at 5% for 2 yr = $100
How it works
Simple interest is a quick way to calculate the extra money earned on a loan or investment when the interest is only charged on the original amount, called the principal. The formula I = Prt works because interest grows in direct proportion to three things: how much money you started with, the yearly rate, and how long the money stays invested or borrowed. Since the rate is written as a decimal and the time is measured in years, the multiplication gives the total interest for that period.
When to use it
Use this formula for problems where interest does not compound, such as some short-term loans, basic savings examples, or classroom finance questions. It is also useful when you need to find just the interest amount, not the total balance.
Worked example, step by step
Principal, P = $2,500 Rate, r = 4% = 0.04 Time, t = 3 years Use the formula: I = Prt I = 2500 × 0.04 × 3 I = 100 × 3 I = 300 Final answer: The simple interest earned is $300.
Common mistakes to avoid
- Using 4 instead of 0.04 for a 4% rate
- Putting time in months without converting it to years
- Finding the total amount instead of just the interest
Did You Know?
Simple interest is linear over time.
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