Interest can be defined as amount charged as fee over borrowed money or assets by lender of amount. The person who borrows the money is called borrower and person who gives money is called lender. This is called as simple Interest or flat rate interest. Let us see how to calculate Simple Interest on a loan.
We calculate simple interest on original principal. Generally loans are expressed in annual Percentage form. Let us discuss steps which are used to calculate simple interest on a loan:
Step 1: First we require all information regarding interest to be paid. Three things are needed to calculate the interest: principal, interest rate and third is time Period.
Unit of interest should be same as principal.
Step 2: Now use amount which we borrowed as principal. Make sure that units of interest and principal are same.
Step 3: Now we express interest rate in decimal form. If we have interest in annual percentage rate (APR) and we want to convert it into monthly rate then we will divide it by 100 and then by 12 or we can say that divide by 1200 to convert the rate from annual to monthly rate.
Step 4: Convert the unit of interest as payment period. If time period is in years then payment period should also be in years.
Example: If principal = $1500 interest rate = 12 % period = 2 years then calculate simple interest?
Solution: I = PRT,
I = (1500 * 12 * 2) / 100,
I = $ 360.