Simple interest

Understanding Simple Interest

• Simple interest is a basic way of calculating the interest charge on a loan.
• The formula to calculate simple interest is I = PRT, where ‘I’ is the interest, ‘P’ is the principal (initial amount of money), ‘R’ is the annual interest rate in decimal form, and ‘T’ is the time the money is borrowed for in years.

Calculating Simple Interest

• To calculate the simple interest, first identify the values for P, R, and T in the problem.
• The principal, or initial amount, is ‘P’. This is the amount of money that is being loaned or borrowed.
• The interest rate, or ‘R’, is provided as a percentage. It needs to be converted into a decimal before being used in the formula. For example, an interest rate of 5% is 0.05 in decimal form.
• The time the money is borrowed for in years is ‘T’.

Example of Calculating Simple Interest

• Using the formula I = PRT, suppose P is £5000, R is 5% (or 0.05 in decimal form), and T is 2 years.
• Substitute these values into the formula to calculate the interest. The calculation would be I = £5000 * 0.05 * 2 to get an interest amount of £500.

Practical Application of Simple Interest

• Understanding how to calculate simple interest is important in real-life scenarios like loan repayments, savings, and investments.
• It helps in understanding how much extra money will be paid or received over a certain period of time.

Checking Your Work

• Always re-check your calculations to ensure accuracy.
• To verify your solution, you can plug the calculated interest amount back into the original problem to see if it makes sense. For example, for a principal of £5000, an interest rate of 5%, and a time period of 2 years, an interest amount of £500 aligns with the initial conditions. If the calculated interest was significantly different from £500, you would need to revisit your calculations.