Simple Interest
By: Dilshad Akrayee
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Definition
Simple interest is interest that is computed
on the original sum.
Formula: Principal amount * Annual
Interest rate* Number of years
Simple Interest is used commonly in
variable rate consumer lending and
mortgage loans where a borrower pays
interest on funds used
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Simple Interest
Time
Interest
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Ex) You want to borrow $8000 at 7% for only 90
days. How much interest you would like to pay?
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I=?
P= 8000
r =7% = 0.07
t= 90 days= 3 months= 0.25 Year
I= P * r * t
I = 8000 *0.07*0.25= $140
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Ex) Max borrows $30,000 to buy a car at 4.2% interest. How
much interest will Max pay if the loan is for 3 years?
I =P * r * t
I = 30,000 (.042)(3) = $3780 interest
How much total will Max pay for the car?
30,000 + 3780 = $33,780.
How much will Max have to pay each month to the bank for
the car?
3 years * 12 months = 36 months
33,780 ÷ 36 = $938.33
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Ex) Marjorie has a credit card that she uses for most of
her purchases. The monthly interest rate on the card is
11.2%. If she charges $1000 in a month, how much
interest will she pay on the balance?
I=P*r*t
I = 1000(.112)(1) = $112
If she can only pay $500 on the credit card, what is her
new credit card balance?
1000 + 112 – 500 = $612
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Ex) Felisha wants to buy a new
computer. She wants to borrow $2500
for 3 years. She will pay an interest rate
of 5%. How much will she owe at the
end of the 3 years?
I = P*r*t
I = $2,500 * .05 * 3
I = $375
The cost of the loan is $375
Making the cost of the computer
$2,500 + $375 = $2,875
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Ex) Tammy borrows $55,000 to buy a car at 2.2% interest.
How much interest will she pay if the loan is for 5 years?
I=P*r*t
I = 55,000 (.022)(5) = $6050 interest
How much total will Tammy pay for the car?
55,000 + 6050 = $61050.
How much will Tammy have to pay each month to the
bank for the car?
5 years • 12 months = 60 months
61,050 ÷ 60 = $1017.5
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