- You started with an investment of:$ on
- Your principal amount grew to:$ by
- Your total NET profit for the period was: $
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There are many reasons to need a simple interest calculator. The idea of paying interest, which is actually a time-based fee, on borrowed money has been around for thousands of years. And, while there are many different kinds of interest, some of which are very complicated, the basic types are easy to understand.
What is “simple interest,” and how can you calculate the amount of it you have to pay on a loan? There are a couple of ways to come up with the answer. First, you can just use an online “simple interest calculator” and plug in a few numbers. Then, the application will do the math and tell you how much interest has accumulated on the loan after any amount of time.
The second way is to not use a calculator at all and just do the math yourself. This talent comes in handy when you don’t have access to a computer. But, it’s also a good idea to learn how to do the figuring manually, so you get a better understanding of how interest works.
The following examples explain how to do the calculations on your own and how to use an online app that does it for you.
Example 1: Using the Simple Interest Formula
If you like to work with math formulas, the one for calculating the total amount of a loan, with a fixed amount of interest, is:
Total Owed = P x [1+rt], where P is the principal amount borrowed, r is the interest rate, and t is the amount of time. For example, if you borrow $1,000 at 6 percent for three years, you would owe this much at the end of the time period:
$1,000 x [1+(.06×3)], or 1,000 x [1+0.18], or 1,000 x 1.18, or $1,180.
It’s easy enough to see that all you’re really doing is plugging in the three variables to the equation. The three are the principal amount you borrow, the stated interest rate, and the number of years you have the loan.
Example 2: Using an Online Simple Interest Calculator
If you don’t want to deal with the math yourself, by far the easiest way to calculate simple interest is to either use a handheld calculator or an online one. The advantage of online calculators is that they will prompt you to input the correct numbers into the appropriate places, so you can’t go wrong.
If you use a handheld calculator, it’s necessary to know the formula or for the device to have an app that serves the same purpose as an online simple interest calculator.
Example 3: Paying Interest on a Car Loan
Keep in mind that people often pay on loans every week or month in the real world, not always at the end of a year. So, taking a more realistic example of buying a car, let’s look at how much interest you’d have to pay per day.
Figuring daily interest means we have to figure out the daily rate from the annual one. So, if your car loan rate is seven percent, take .07 and divide it by 365 to get the daily rate, in this case, .0001917.
That may seem like a very small number, but remember that it’s the “daily” rate. So, if you decide to pay only the interest portion of the loan after two weeks, assuming the price of the car (the principal amount of the loan) was $22,000, then you’ll have to multiply $22,000 by the daily rate: 22,000 x .0001917, which comes out to $4.21 per day.
But, wait. You usually need to pay two weeks’ interest, so we’ll multiply the $4.22 by 14 (days) to come up with $59.08 as the two-week amount of interest on the car loan.
Example 4: Lending Money to a Friend, Quick Shortcuts
What if you’re the lender instead of being the borrower. You decide to loan money to a needy but trustworthy friend who insists on paying interest. The two of you agree that the friend will pay interest-only every week and the entire principal amount at the end of one year.
You loan the friend $5,000, and the interest rate is four percent. You can use the “daily rate” method from example three above or use a simple interest calculator, or try this more straightforward way.
At the end of the year, the total amount of interest would be $5,000 x .04, or $200. So, just take the total amount of yearly interest, $200, and divide it by 52 to get the amount of weekly interest (because there are 52 weeks in a year). So, since 200 divided by 52 is $3.84, your friend will be paying you that much every week to cover the interest on the loan that you so kindly made to him.