Simple Interest
Interest earned on principal at a simple rate.
Formula
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Example
$1000 at 5% for 3y = $150
How it works
Simple interest calculates how much money is earned or charged based only on the original principal, not on previous interest. The formula I = P r t works because interest grows at a constant rate per year, so multiplying the amount invested or borrowed by the rate and the time gives the total interest. It is used when interest is not compounded.
When to use it
Use this for loans or savings situations where interest is stated as simple interest, especially over a fixed time period. It is common in basic finance problems, short-term loans, and classroom exercises.
Worked example, step by step
Principal, P = $800 Rate, r = 6% = 0.06 Time, t = 2 years I = P r t I = 800 × 0.06 × 2 I = 48 × 2 I = $96 Final answer: The simple interest earned is $96.
Common mistakes to avoid
- Using the percent 6 instead of converting it to 0.06
- Putting time in months without converting it to years
- Mistaking simple interest for compound interest and adding interest to the principal each year
Did You Know?
Simple interest is charged only on the original principal — rare today outside some short-term loans.
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