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What is Simple Interest? Example, Formula, Solved Examples, and FAQs

The concept of SI is employed in most areas such as finance, banking, automobile, and so on. Through this article learn the concepts of SI, through the formula, and examples on how to calculate simple interest. Comes under one of those highlighted topics that are most commonly asked in all competitive exams like SSC, SBI Clerk, and similar exams.

For instance, when you put an FD of Rs. 1 lakh in a bank at the rate of 7% for one year, the bank uses your money for its operations in that simple interest definition duration. In exchange for that you will receive Rs. 7000 interest income annually. See how easy and quick it is to estimate simple interest!

  • You can also check the EMI amount for different tenures.
  • This ultimately dictates the total earnings or cost of the undertaking.
  • Through this article learn the concepts of SI, through the formula, and examples on how to calculate simple interest.
  • Compound interest is frequently a component in real-world business transactions, investments, and financial goods that are designed to last for several months or years.
  • Find the amount invested in scheme B if total interest earns after 2 years is Rs. 6640.

In this particular article, our focus was on S.I from all corners. Let us understand the difference between simple interest and compound interest. In the simple type of interest, the interest always applies to the original principal amount, with the same rate of interest for every time cycle. When we invest our money in any bank, the bank provides us with interest on our amount. The formula or methods to calculate compound interest is derived from simple interest calculation methods. The rate of interest is the interest on every $100 for a fixed time period.

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Now keep track of your cash flow and manage your incomes and expenses with ease by using the Cashbook app by Khatabook. On each type and then, you can compare each type to make an informed decision about the best interest rate for your situation. Otherwise, it will be rounded down to the nearest whole number.

simple interest definition

While it may be tempting to choose the easiest option, it is not the best option for many. However, in the case of a loan, interest calculated at a simple interest rate will end up being lower in comparison to interest calculated at a compounding interest rate. In fact, compound interest with credit is usually applicable to penalties or outstanding balance. Here, the total amount payable continually grows based on how long it is left unpaid.

Whenever we borrow a certain sum of money , we pay back the original amount accompanied with a certain amount of interest on that amount. In a way, those are the charges of borrowing that sum of money. Simple interest is one method of determining the amount due at the end of loan duration. Another method of interest application is compound interest, but we study about it in next article. Compound interest, on the other hand, is the interest calculated on the principal and interest accumulated over the previous tenure. As a result, compound interest is also known as “interest on interest.” It is crucial in determining the amount of interest on a loan or investment.

Simple & Compound Interest Terminology

Compound interest is accumulated throughout the tenure periodically and added to the original principal amount. Simple interest is the interest calculated on the original principal amount for the entire tenure. Goseeko covers the entire spectrum of student’s journey from Academics to Career. With the advent of online free calculators, you can directly calculate the simple interest amount instantly without the need to do it manually.

The principal amount is the initial amount invested or borrowed by an individual from the bank.RR is the interest rate in percentage. The rate at which the principal amount is given to somebody for a certain time stands for the rate of interest.TT specifies the time duration in years. The duration for which the principal amount is provided to someone denotes the time.

simple interest definition

To have a better understanding of how Simple Interest works, let’s consider this example. With a Simple Interest Calculator, you can calculate the interest without any error by saving time and effort. Principal amount remains constant during the entire tenure on Simple Interest. Understanding the Simple Interest Formula is essential to know about the basics of finances. A quick and constant learner, Akhil can bring off any niche in demand with his expertise in simplifying the complex. Being a lifelong Michael Jordan fan, he hopes to achieve the dream of meeting his idol one day.

Hence with higher compounding periods, the interest will also be higher. Mr Charan invests INR 10,000 at the rate of 10% for five years. Is computed by multiplying the interest rate for a period by the principal amount and the tenure. Hence the interest rate has to be converted accordingly before multiplying with the principal amount and tenure.

Simple Interest Vs Compound Interest – Definition & Power of Compounding

The principal is the amount that initially borrowed from the bank or invested. Compound interest is a treat for people who work tirelessly day and night to earn money in order to realize their dreams and ambitions. Compound interest is similar to multiplying the amount of money in your bank account. In fact, earning compound interest is advantageous because it is more than just simple interest on a specific amount of money.

Simple interest is not only a simpler way to calculate the amount of money that you owe on a loan but is also an effective way to do so. The monthly interest rate is multiplied by the principle, by the number of days between payments, in order to calculate how much interest you will earn. When we invest our money in any bank, the bank provides us interest on our amount. The interest applied by the banks is of many types one of them is simple interest.

simple interest definition

Have read and understood the terms and conditions contained below (“Terms”). To calculate it online, you simply have to use a free online calculator. These provisions are available easily with a quick search and all you need to do is input the values of the variables. Thus, you will receive an additional interest of ₹ 2.50 Lakh at the end of maturity period of 5 years. Further, the maturity amount of the Fixed Deposit will be ₹ 7.50 Lakh.

The test paper will be totally subject to the NCERT course book. Accordingly, understudies are endorsed to generally focus on the NCERT text. Build revenue acquires revenue on the recently procured revenue, rather than Simple Interest, which acquires interest on the primary total. The entire idea depends on creating critical returns by building interest on the primary sum. The time is in years and the rate of interest is in percentage (%).

Things To Know to Prepare for CBSE Class 12 Exams

Simple interest is an interest rate calculated on the principal amount or the portion of the principal that is still owed. Accordingly, these books are satisfactory for basis for evaluations. With respect to additional fostering your basics, these messages are awesome. It has a lot of settled models and activities that aide in an understudy’s learning.


Auto loans and short-term individual loans are normally SI based loans. Interest expense, on either hand, is calculated using the principal balance and the interest earned over time. Simple interest is easier to compute than compound interest because it is calculated solely on the principal. Now, before going deeper into the concept of simple interest, let’s first understand what is the meaning of a loan. It is the total compound interest or simple interest earned plus the original principal.