SIMPLE INTEREST

                                                      SIMPLE INTEREST

Simple interest – The interest is the extra money which is paid by the borrower for the benefit of using the lender’s money.

Principal – The money borrowed from a lender is called principal.

Interest – The additional money paid by the borrower to the lender after a specified period of time is called interest.

                Or, The extra money paid for using the principal is called the interest.

Amount – The total money paid by the borrower to the lender is called amount.

                Or, The total money which is received or paid back is called amount.

                               

                                Amount = Principal + Interest

Time – the period after which the amount is to paid back is called the time.

                                Suppose, we deposit ₹1,000 for three years at the rate of ₹150of interest per year in a bank. It means the bank will have to pay us extra ₹150 at the end of first year, ₹150 at the end of second year and ₹150 at the end of third year.

                Thus, after three years:

                                                Principal = ₹1,000

                                                Interest = ₹150 + ₹150 + ₹150 = ₹450

                                                Amount = Principal + Interest

                                                                  = ₹1,000 + ₹450 = ₹1,450. 

Rate of Interest – The rate of interest is usually expressed in percentage.

                                An interest rate of ‘8% per year’ means the borrower has to pay ₹8 as interest for the loan of ₹100 at the end of one year.

ð  We also write ‘annual’ for ‘per year’.

ð  As the rate of interest is usually expressed in ‘per year’, we generally do not write ‘per year’ against the rate of interest.

Calculating interest –

                The interest depends on the principal, the rate of interest and time period for which the money is borrowed or deposited.

                Suppose, we have to calculate simple interest on ₹500 for 3 years at 10% per year.

                                Now, interest on ₹100 for 1 year = ₹10 (rate 10%)

                                           interest on ₹1 for 1 year = ₹

                                 interest on ₹500 for 1 year = ₹

                                 interest on ₹500 for 3 years = ₹

                        Here, we see that the interest is calculated as

                                                                Simple interest = ₹

                                                                        I = ₹

Ø  In this formula, R is in ‘per cent per year’ and T is in years.

Formulae -