In contrast to compound interest, which adds the interest of previous years’ principal to calculate the interest of the next year, the principal amount in simple interest is always the same. Simple interest is a method of calculating the amount of interest charged on a sum at a given rate and over a specified time period. You will be introduced to the concept of borrowing money and the simple interest that is derived from borrowing in this lesson. You’ll also learn about terms like principal, amount, rate of interest, and time period. You can calculate simple interest using the simple interest formula using these terms.
S. I = (P X R X T) / 100
If you make a payment on a simple interest loan, do you know where the money goes? The money first goes toward the interest for that month, and the rest goes toward the principal. The interest is paid in full each month, so it never accumulates. Whereas compound interest adds some of the monthly interest back onto the loan; each month, you pay new interest on old interest.
To understand how simple interest works, consider a car loan with a $15,000 principal balance and a simple interest rate of 5% per year. If your payment is due on May 1 and you make it on time, the finance company calculates your interest for April. In this case, your 30-day interest is $61.64. If you pay on April 21, however, the finance company will only charge you interest for 20 days in April, lowering your interest payment to $41.09, a $20 savings.
Most banks now use compound interest on loans because it allows them to collect more money as interest from their customers, but this method is more complex and difficult to explain to customers. Calculations, on the other hand, become simple when banks use simple interest methods. Simple interest is very useful when a customer needs a loan for a short period of time, such as one month, two months, or six months.
Compound interest accumulates as well as it is added to the accumulated interest from previous periods; it is, in other words, interest on interest. The following is how compound interest is calculated:
Compound Interest formula – P* – P
P = Principal sum
Annual interest rate = r
T = The number of years for which interest is charged.
It is calculated by multiplying the principal amount by one, multiplying the annual interest rate by the number of compound periods, and then subtracting the principal reduction for that year. When using compound interest, borrowers must pay interest on both the interest and the principal.
Simple vs. Compound Interest Interest can be simple or compounded. Simple interest is calculated on the loan or deposit’s original principal amount.
Compound interest, on the other hand, is calculated by combining the principal amount and the interest that accrues on it over time. Simple interest is easier to calculate than compound interest because it is calculated only on the principal.
In real life, compound interest is frequently a factor in business transactions, investments, and financial products that are intended to last for several months or years. In daily life, simple interest is primarily used for simple calculations, such as those for a single period or less than one year. Simple interest also applies to long-term situations like credit card balances.
1. Simple interest is calculated by multiplying the daily interest rate by the principal and then by the number of days between payments, that is the time period.
2. Consumers who pay their loans on time or early each month benefit from simple interest.
3. Auto loans and short-term personal loans are typically interest-only loans.
If you express a ratio or a number in the form of fraction (100), it is denoted by percent. Example: (3:4)/100 will give its percentage. Percentage is shown by the symbol % or pct. or just pct. It doesn’t have any other unit of measurement. It is used in our daily life to calculate various situations. Example giving your 100% means giving your best or trying to do something to your full potential. Getting 100% marks means scoring full marks in exams. Similarly, there are many other examples to show the value of percentage in our daily life.
The percentage formula is required to find the percent of something or some number. It means per hundred. Let us understand it better with an example:
If you have 100 Chocolates with you and you have to give 50 of those to your sibling, then what percent of Chocolates will you share with him? Let’s Find out.
Chocolates shared/Total Chocolates) *100 = (50/100) * 100 = 50 %.
It shows you will give 50 % of your chocolates to your sibling.