Application to Simple Interest



When money is borrowed, interest is charged on the amount borrowed for a specific period of time. This is called simple interest.

The borrower has to pay back the lender the sum of the principal amount and the total interest for the specified period of time.

Simple Interest =(Principal x Term x Rate of Interest )/100

Simple interest is mentioned in percentage.

Consumer loans:

Let us consider we buy a television for Rs.20,000 and pay simple interest at an annual rate of 8% in monthly installments, your monthly payment would be approximately  Rs.1740. This means that you would end up paying a total of Rs.20,880, for total interest expense of Rs.880. This is comparatively less than the Rs.1600 you would have paid in interest expense if you had carried the Rs.20,000 loan for the full year, instead of repaying a portion of it every month.

On certificates of deposit for periods of one year or less:

 If you invest Rs.100,000 in a one-year certificate of deposit (CD) that pays interest at 2% per annum, you would earn Rs.2,000 in interest income (i.e., Rs.100,000 x 2% x 1 year) after a year. If the CD pays the same annual interest rate but is only for a six-month period, you would earn Rs.1,000 in interest income after six months.

Discounts on early payments:

In business scenario suppliers often offer a discount to encourage early payment of their invoices. For example, Rs.50,000/- invoice may offer a 0.5% discount for payment within a month. This works out to Rs.250 for early payment, or an annualized rate of 6%, which is quite an attractive deal for the payer.