The most common type of interest is simple interest.
Simple interest is calculated only on the principal amount of a loan or investment. This means that the interest earned each period is not added back to the principal to earn further interest.
Here's how it works:
- Principal (P): The initial amount borrowed or invested.
- Interest Rate (R): The percentage charged or earned on the principal.
- Time (T): The duration of the loan or investment.
The formula for calculating simple interest is:
Simple Interest (SI) = (P R T) / 100
For example, if you borrow $1,000 at a simple interest rate of 5% for 2 years, the simple interest you'll pay would be:
SI = (1000 5 2) / 100 = $100
Simple interest is commonly used for short-term loans, savings accounts, and some types of bonds.
