What is Simple Interest?
Simple Interest (SI) is a method of calculating interest on the principal amount only. Unlike compound interest, it doesn't add earned interest back to the principal. It's commonly used for short-term loans and some types of savings instruments.
Simple Interest Formula
SI = P ร R ร T / 100
Where: P = Principal Amount, R = Annual Interest Rate (%), T = Time Period (Years)
Total Amount = P + SI
For example, if you invest โน1,00,000 at 10% per year for 5 years, the simple interest would be โน50,000 and the total amount after 5 years would be โน1,50,000.
Simple Interest vs Compound Interest
In simple interest, interest is calculated only on the original principal amount throughout the tenure. In compound interest, interest is calculated on the principal plus any accumulated interest from previous periods. For longer time periods, compound interest always results in a higher total compared to simple interest at the same rate.
FAQs
Where is simple interest used?
Simple interest is commonly used in short-term personal loans, car loans (in some cases), certain government savings schemes, and in basic lending between individuals. Banks mostly use compound interest for deposits and loans, but understanding simple interest helps in comparing different financial products.
Which is better โ simple or compound interest?
For borrowers, simple interest is better because you pay less total interest. For investors, compound interest is better because your money grows faster over time. The difference becomes more significant with longer time periods and higher interest rates.
Can I calculate monthly simple interest?
Yes! Just divide the annual rate by 12 to get the monthly rate, or multiply the time in months by 1/12 in the formula. For example, for 6 months: SI = P ร R ร 0.5 / 100 (since 6 months = 0.5 years).