How to Calculate Simple Interest

Interest is a fee paid for the use of credit or money and may refer to the dollar amount or the rate of payment. Simple interest is calculated only on the original principal. Consumer loans in the United States have been required to be expressed as an annual percentage rate (APR) since the passage of the Truth in Lending Act of 1968. Here's how to calculate simple interest.

Difficulty: Moderate

Instructions

1. Obtain the information required to calculate the total amount of interest to be paid. The principle, the interest rate and the length of the loan is needed. The interest payment will be in the same units as the principal.

2. Use the amount of money you wish to borrow as the principal. Ensure you use the same units of currency that you want the interest payments expressed in.

3. Express the interest rate as a decimal fraction of the interest rate for the payment period. For example, the interest rate should be given to you as an APR but the payment period is usually monthly. In this case, we would divide the APR by 100 to get a decimal fraction and then by 12 to convert the annual rate to a monthly rate. In other words, divide the APR by 1,200 to get the monthly interest rate.

4. Convert the units for the length of the loan to the same units as the payment period. For example, if the length of the loan is in years and the payment period is in months, you would need to multiply the length of the loan by 12.

5. Look at the following example to calculate the simple interest. You wish to borrow $1,000 and the bank has offered to loan you this amount at 3.5 APR for 18 months. The interest payment is calculated as I=PRT. P is the principal, which is $1,000. R is the rate, which will be 3.5/1,200 because you will be making monthly payments. T is the term of the loan in months, which is 18. Therefore, I = 1000 x 3.5/1,200 x 18 = 52.50. The total interest on this loan will be $52.50.

Resources

• Learn more about calculating interest at Learningwave.