Simple interest is the interest earned or paid on a principal amount of money that is borrowed or loaned to someone. You can calculate simple interest by multiplying the principal amount times the rate of interest times the term of the loan.
How to Calculate Simple Interest
Simple interest is calculating by using the formula:
SI = (P × R × T)
Calculate simple interest by plugging your figures into the formula where SI represents simple interest, P represents the principal, R represents the interest rate in decimal form and T represents the term in years or months.
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You can find your simple daily interest by dividing your annual interest rate by 365 and multiplying it by the loan balance. This method is used by financial companies to compound interest daily when you have a loan due on a specific day of the month. Its function is to charge you interest by the day for the amount of days from your last payment to your present payment. If you make an early payment, the interest is calculated only for the days since your last payment. Your loan balance is reduced on the day you make your payment rather than on the due date of the payment.
Examples of Calculating Simple Interest and Simple Daily Interest
For an example of simple interest, if your principal is $1,000, your interest rate is 10 percent and your term is 1 year, your formula would be:
SI = (1,000 × .10 × 1). The simple interest in this case is $100 per year.
From the above example, your simple daily interest would be:
$100 ÷ 365 = 0.2740 (rounded off)
To arrive at the rate of interest per year in decimal form, use this formula:
r = R ÷ 100
Where R is the rate of interest per year as a whole number, such as 10 percent.
To arrive at the rate of interest per year as a percent, multiply the rate of interest in decimal form times 100 using this formula:
R = r × 100
Simple interest differs greatly from compound interest. Compound interest is usually the choice of calculations for lenders, such as mortgage companies and financial institutions. In essence, you borrow money from an organization and you pay interest on top of the interest on the loan.