Simple interest is when interest is calculated only on principal and does not include any previously earned interest.  The formula for calculating simple interest is as follows:

I = Prt

where I is simple Interest, P is Principal, r is the annual interest rate and t is time (in years).

Simple interest is typically used on loans that are one year in length or less.

Example 1  Calculate the simple interest attained from a $6,100 loan at 5% for 8 months.

Here, P = $6,100, r = 5% = .05, and t = 8/12.  Simple interest is:

I = (6100)(.05)(8/12) = 203.33

Future Value and Present Value

A borrower, typically, has to repay the principal plus earned interest.  The total amount that the borrower has to pay is oftentimes called the maturity value, future value or accumulated value of the loan.  We use the letter A to denote the accumulated value of the loan and can think of the letter P, the principal, as the present value of the loan.  The relationship between future and present value is:

A = P + I = P + Prt = P(1 + rt)      or,     P = A / (1 + rt)

Example 2   $1,200 is invested for 11-months at 8% annum.  Find the accumulated value of the loan. 

Here, A = 1200[1 + (.08)(11/12)] = 1288.

The amount of interest earned is 1,288 - 1,200 = $88.

The online calculator below calculates simple interest.

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