Interest and Simple Interest Formula: Definition, Sample Questions, Tips and FAQs

Quantitative Aptitude Prep Tips for MBA 2024

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Vipra Shrivastava

Vipra ShrivastavaSenior Manager - Content

Updated on Feb 5, 2024 16:44 IST

Simple Interest is a commercial mathematical application to calculate the interest payable on any loan or due amount to the party. It is used extensively in the financial sector, including the banks, financial institutions, to mortgage any property in return for payments calculated as Simple/ Compound Interest. Interest is the extra money that we pay, along with the principal amount to the lender.

Simple Interest is widely used in the banking and financial sector for loan related activities and transactions. When a person takes a loan from the bank, the repayable amount is calculated based on their interests.

Simple Interest is a broad topic mixed with the compound interest to check for their differences. Banks provide loans on compound interest rate because it fetches more interest on their principal in the same tenure. Nearly all financial institutions use the compound interest rate. But the simple interest calculation is an integral part of compound interest as the first interest in CI is calculated using the simple interest formula. Therefore, Simple Interest and Compound Interest is an integral part of the Quantitative Aptitude section of various academic and professional entrance exams. Hence knowledge of simple interest is essential to solving compound interest problems. 

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What is Simple Interest?

Simple Interest is the interest calculated on the principal amount you have to pay to the lender. The borrowed sum is called the principal amount. Due to the borrower’s timely help, the lender agrees to pay them some portion of money calculated on the principal amount as interest. This interest is calculated using the Simple Interest formula given below.

Simple interest formula: (P * R * T)/100

Where,

  • P - Principal
  • R - Rate
  • T - Time

Total repayable amount (A) = P + SI (Simple Interest)

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Simple Interest for Months

The above formula given is for the annual calculation of interest. But there is an alternative formula to calculate interest every month. Monthly concepts are used in gold financial institutions like the Muthoot, Malappuram loan services, which usually charge interest based on months.

Simple Interest formula:

SI = (P * R * n)/ (12*100)

Where, n – number of times (monthly) the interest is calculated in a year.

What is the Difference Between Simple Interest and Compound Interest?

The fundamental difference between Simple Interest and Compound Interest is their nature and calculation strategies. While the simple interest is solely calculated on the principal amount, the compound interest is calculated on the principal amount and the interest generated. So compound interest is the interest on the interest. Hence, compound interest will always be equal to or greater than simple interest.

Simple Interest Formula & Examples

Q 1:  A principal amount of Rs 10,000 is taken at 15% interest rate p.a. for two years. Calculate the SI on this sum and the final payable amount.

Solution: W.

Interest charged on Rs 10,000 is, 15/100 * 10,000 = Rs 1,500

Interest for two years = Rs 1,500 × 2 = Rs 3,000

The amount payable after two years = principal + interest

= Rs 10,000 + Rs 3,000 = Rs 13,000

Q 2: Calculate the Interest on the principal amount of Rs 20000 for one year at R=8%?

Solution: Assume the Principal for the first year to be P. Here, P = Rs 20,000

SI = SI at 8% per annum for the first year = Rs 20,000 * 8 /100 × = Rs 1,600

Q 3: Can interest be calculated daily?

Solution: Yes, One can calculate the interest daily by replacing the formula with n days in the numerator.

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FAQs Related to Simple Interest Formula

Q: Why do we calculate simple interest?

A: Simple interest is calculated to take out the interest payable on the principal amount to the lender.

Q: How many types of simple interest are there?

A: There are many types of simple interest based on the number of days we are taking for the calculation. It can be annually, monthly, or one day’s period.

Q: What are the two types of interest?

A: The two types of interest are Simple Interest and Compound Interest.

Q: Is simple interest easy to calculate?

A: Simple Interest is the primary form of calculating interests and are easy to calculate.

Q: What is simple interest formula?

A: Use this formula to calculate simple interest, Simple interest: (P * R * T)/100 Where,
  • P - Principal
  • R - Rate
  • T - Time
Total repayable amount (A) = P + SI
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