# Simple Interest Calculator: How it works?

Looking for a calculator that can calculate your Interest? Or do you know how simple interest calculator works? We are here to solve your problem.

Simple Interest is money you can earn by investing some money i.e. the principal. The Interest of the principal is added to the principal to get the Amount you have to pay after a particular period of time. To calculate interest only, you can use simple interest calculator. It is an online tool to calculate simple interest charged on a principal at a certain interest rate for a particular period of time. When money is borrowed or lent at simple interest, the interest is charged only on the principal amount of money, not on any interest that it has earned.

### Simple Interest Formulas and Calculations

Simple Interest is calculated by multiplying the interest rate by the number of periods (time) by the principal.

Where P= Principal i.e. Sum

R= Rate of Interest

T= Time

Simple Interest is abbreviated as SI and the most basic type of interest. When it comes to online calculation, this calculator will assist you to calculate total interest after a certain period of time. You can also calculate Principal (P), Rate of Interest (R), and Time (T) by using the formula given above. But, you have to keep in mind that when you are calculating one particular thing, values of other things must be known to you. For example, if you are calculating Principal i.e. sum, values of SI, the rate of interest, and time must be known to you otherwise you won’t be able to calculate the Principal amount.

• To calculate Principal Amount (P), solve for P.

P= (SI×100) / R×T

• To calculate Rate of Interest (R), solve for

R= (SI×100) / P×T

• To calculate Time (T), solve for T.

T= (SI×100) / P×R

### How it works?

To calculate simple interest, it is very important to understand the concept of a unit period. A period is a unit of time i.e. it may be a day, a week, a month, a year, or any other unit of time that is consistent over the entire term for which money is invested or borrowed. The term is the time between the start date and end date which is divided into the selected unit periods. Generally, Interest is calculated as of the end of each period.

You can follow the steps mentioned below to calculate simple Interest:-

The principal amount is the initial sum of money which was lent or invested and on which interest is calculated. For example, let’s say you have lent a friend \$25,000 dollars to help him to open a new business. The principal amount of this loan is 25,000 dollars.

• Write down the rate of Interest: -

The rate of interest is the percentage of the principal amount that will be paid as interest for each time period in which interest accumulates. You have to write down the rate of interest as a decimal. The rate of interest is written as percentages, which is divided by 100 to give you a decimal value. For instance, let’s say that you have told your friend that \$25,000 loan would have an interest rate 4 %. You have to write it as decimal, i.e. 4/100 = 0.04.

• Know the time periods of the loan: -

To calculate simple interest, you must recognize that Interest gets built up over regularly-spaced periods of time. For annual interests, the time periods are years, and it can be days, weeks, or months. Write down the time value as a simple integer or decimal, which will represent how many time periods pass before the loan will be paid. For example, you told your friend that he has to pay back, with annual interest, in 5 years. So, time period will be 5. However, for different intervals, time period will be different. Let’s say you agreed upon monthly interest over the 5 year life of the loan, the time value will be 5 years × 12 months = 60.

• Substitute your values for P, R, and T into the formula: -

Simply put your values for P, R, and T into the formula SI= P×R×T. You have to multiply the principal× rate of interest× time to determine the amount of simple interest on the loan. The value you get will be the amount you owed in addition to the principal. For instance, substitute P= 25,000, R= 0.04, and T= 5 (when the annual rate of interest) into the formula, you will get \$ 5,000 which will be the interest at the end of 5 years.