Simple interest definition and simple interest formula
According to the widely accepted definition, simple interest is an interest that is paid or computed on the original amount of a loan or the amount of a deposit. The simple interest formula is:
interest = amount * interest_rate
Did you know that the term simple interest was used for the first time in 1798? (That year, the words rentier and working capital appeared in the English language for the first time, too).
How to calculate simple interest?
Are you wondering how to calculate simple interest? Here is an example which should help you understand it. Let’s assume that you put
$1,000 on your savings account. It is the so-called original amount. (Note that you can also treat this
$1,000 as the initial value of your loan with simple interest).
- First of all, take the interest rate and divide it by one hundred.
5% = 0.05.
- Then multiply the original amount by the interest rate.
$1,000 * 0.05 = $50. That’s it. You have just calculated your annual interest!
- To get a monthly interest, divide this value by the number of months in a year (
$50 / 12 = $4.17. So your monthly interest is $4.17. If the initial
$1,000is a deposit, this is your monthly profit. If this
$1,000is a loan, this value represents your monthly payments.
Now let’s try to make some further calculations.
If you want to compute the sum of interest paid over the specified period, all you need to do is to multiply the monthly interest by the adequate number of months or years.
For example, you may want to calculate the total interest you will receive during next two and a half years. To do so, you need to multiply
$4.17 by 30 (2 years = 24 months, half a year = 6 months).
$4.17 * 30 = $120.83.
Obviously, all of the above calculations might be done quickly and painlessly with our smart calculator. When testing this tool, don’t forget to try the advanced mode.