SIMPLE INTEREST

By definition, SIMPLE INTEREST is the interest amount for a particular principal amount of money at some rate
of interest. It is an easy method of calculating the interest for a loan/principal amount. It is a concept that is
used in many sectors such as banking, finance, automobile, and so on.

Simple Interest Formula

I = Prt
Where: I = interest (simple interest)
P = principal
r = rate of interest
t = time

I
P r t

Simple Interest Problem:

Digong takes a loan of Php 250,000 from a bank for a period of 1 year. The rate of interest is 10% per annum.
Find the interest and the AMOUNT he has to pay after a year.

Solution:

Given: P = 250,000
r = 10%
t = 1 year
I=?

I = Prt
= (250,000)(10%)(1)
= 25,000 x 1
= 25,000

The simple interest for a year is 25,000

And the amount that Digong has to pay to the bank at the end of the year is:
Principal + Interest = P + I = 250,000 + 25,000 = 275,000
In order to calculate the total amount, the following formula is used:

Amount (A or F) = Principal (P) + Interest (I)

Where Amount (A or F) is the total money paid back at the end of the time period for which it was borrowed.

The total amount formula in case of simple interest can also be written as:

A or F = P (1 + rt)

Where:

A or F = total amount after the given time period

P = principal amount or the amount borrowed
r = rate of interest (per year)
t = time (in years)

From the example given above, substitute the value and solve for the amount:

A or F = P (1 + rt)
= 250,000 (1 + .1 x 1)
= 250,000 (1.1)
= 275,000

Example #2

Leni borrowed 50,000 for 3 years at the rate of 3.5% per annum. Find the interest accumulated at the end of 3
years.

Solution:

Given: P = 50,000
r = 3.5%
t = 3 years
I=?

I = Prt
= (50,000)(3.5%)(3)
= 1,750(3)
= 5,250
ASSESSMENT:

1) Monroe deposits 5,000 in a bank which pays 6% simple interest per year. How much interest will he
get from his deposit after 4 years.

2) Jefferson invests 16,500 in a pyramiding scheme with an interest of 35% per annum. After 2 years
and 6 months, he decided to withdraw his money. How much total money will he get upon his
withdrawal?

3) XYZ Company purchased a photocopying equipment on account. The machine costs 350,000 to be
paid after 1 year with an interest rate of 15%. How much will XYZ need to pay at the maturity of the
loan?
MATURITY VALUE
The loan is said to be mature when the time period of the loan reaches its maturity date. In that time,
the borrower will pay back the principal (P) and the interest (I). The total repayment is known as the
maturity value or the future value. There are two ways to determine the maturity value of future
value (F).

a) F=P+I b) F = P (1 + rt)

PRINCIPAL AMOUNT
When a person or business borrows money through a loan, the amount borrowed is known as
the principal amount. Unless the loan is interest-free, one always pays more than the principal amount
to the lender. To compute for the principal amount (P), we have the following formula:

When the interest (I), time period (t) and rate of interest (r) is given, we use:

P = I / rt

When the maturity value (F), time period (t), and rate of interest is given (r), we use:

P = F / (1 + rt)

Illustrative Examples:

1) James paid P36,000 interest on a 12% loan at the end of three years, how much did he borrow?

Given: I = 36,000 r = 12% or .12 t = 3 years

The problem is asking for the principal amount that James borrowed given the interest, rate and
time; to compute, we use the formula:

P = I / rt

Substituting the given to the formula, we will have:

P = 36,000 / (.12) (3)

P = 36,000 / .36
P = 100,000

The original amount James borrowed was P100,000

 2) What is the principal amount of P7612.50 due in 4 months if 4.5% interest is paid?

From the problem, the given are the maturity amount, rate, and time.

Given: F = 7,612.50 r = 4.5% or 0.045 t = 4 months = 4/12 or 1/3

To compute for the principal amount, use the formula:

P = F / (1 + rt)

Substituting the given to the formula, we will have

P = 7,612.50 / 1 + (.045) (1/3)

P = 7,612.50 / 1 + 0.015
P = 7,612.50 / 1.015
P = 7,500
The principal amount of the loan is P7,500.

TIME PERIOD
Time period tells you how long the loan will exist. Time is expressed in years. If the time is given in months or
days, it can be converted by using:

a) t = number of months / 12 b) t = number of days / 360

NOTE: Unless specified, 360 days is used in all simple application

To compute for the time period on a loan or investment, this formula will be used:

t = I / Pr

Illustrative Example:

How many months will it take for P25,000 to earn 500 if it is invested at 4% simple interest?

Given: P = 25,000 r = 4% or .04 I = 500

t = 500 / 25,000 (.04)

t = 500 / 1,000
t = 0.5 years or 6 months
SIMPLE INTEREST RATE
The percentage of the principal charged as the interest each year is known as rate. The rate is expressed as a
decimal or fraction, so percentage must be divided by 100.

For example, if the rate is 15%, then use 15 / 100 or 0.15 in the formula.

To determine, the simple interest rate, this formula is used:

r = I / Pt
Illustrative Example:

At what rate must P5,000 savings account earns 700 in 24 months?

Given: P = 5,000 I = 700 t = 24 months or 2 years

r = I /Pt
r = 700 / (5,000) (2)
r = 700 / 10,000
r = 0.07 or 7%

at 7% rate, a P5,000 savings will earn 700 in 24 months or 2 years

ASSESSMENT: Solve the following problems
1) Find the interest rate and amount on P125,000 at 7% interest in one and a half year.
2) What amount of interest will be charged on P15,000 borrowed for 6 months at a simple interest rate of
15%?
3) How much was borrowed if the interest at 6% rate after 5 years is P19,500?
4) Annie borrowed P25,000 for three months and paid P1,000 interest. What was the interest rate?
5) How long will it take for P8,000 to earn P360 at 6%?
6) Warren borrowed P28,000 and after 2 years, paid back the loan with 8% interest, how much was the
interest paid
7) Fatima placed P18,000 in a 240-day term deposit earning 8 ½%. How much will Fatima get on the
maturity day?
8) What is the rate of interest on a six-months loan for P15,000, if the interest on the loan is P1,125?
9) Find the time to accumulate an interest of P10,200 when P85,000 is invested at 4% simple interest.
10) Pia repays her loan for P40,250. If the loan was for 15 months at 12% interest rate, how much was the
principal amount?
11) A credit union charges P600 interest for the use of P12,000 for 90 days. What simple interest rate is in
effect?
12) If Jessica loaned P300,000 from a bank charging 9% simple interest, how much would she pay at the
end of three years?
13) How much will Eric receive if he invested P100,000 for one year and three months at 15% interest?
14) When must P8,946.25 be due if its principal amount at 7% is P8,500?
15) Jane borrowed P10,500 from GSIS at 5% for two years, payable monthly for the same period. How
much will be her monthly payment?