A beginner’s guide to Simple Interest
Interest rates play an essential part in the entire loan acquiring process. What is simple interest definition, you ask? Well, simple Interest is a type of interest that is applied on the amount of money borrowed or invested during a certain period of time. This interest is only calculated on the principal amount without taking any other financial considerations into account. Before going in to the specifics, you need to first learn how to calculate simple interest.
Simple interest is calculated using the following formula –
- I = P x r x t
Where I – interest
- P – principal amount
- r – rate of interest
- t – time period
You have to remember that the rate of interest is generally given in percentage or a ratio of the principal amount. Hence, it is calculated in decimals. The time period is the total duration of the loan, also called the loan tenure.
Interest rates are a key factor in zeroing in on the perfect loan or investment option. Bajaj Finserv offers Personal Loans at attractive interest rates with easy approval policy.
Calculating Simple Interest
A question that bothers almost every borrower is what is simple interest example? Here’s a simple one for you:
If you take a loan of INR 1000 (P) at an interest rate of 5% (r) over a period of two years (t), the simple interest will be calculated in the following way –
- I = 1000 x 0.05 x 2 = 100
So the interest paid over the period of the loan would be INR 100, and the total amount paid along with the principal would be INR 1100.
Applying Simple Interest to Your Finances
Generally, you can apply simple interest for loans but in certain financial transactions that include credit cards, simple interest is replaced by compound interest. Compound interest used in credit card transactions can be quite burdensome, and the calculation process is complicated. But if you apply for a Bajaj Finserv Standard Chartered World and Platinum Credit Card, you can earn benefits every time you use the credit card and avail of features like utility bill payments and redemption opportunities.
For a short-term loan, the total amount that you need to pay is called the maturity value or future value of the loan. If you have applied for a short-term loan or are planning to invest for a short period of time, you can calculate the amount of interest you need to pay or receive by the following simple interest loan formula –
- A = 1000 (1 + (0.05 x 2)) = 1000 (1 + 0.1) = 1000 X 1.1 = 1100
Therefore, the total amount would be INR 1100.
Once you understand the concept of simple interest, you can follow up with understanding the different kinds of interest available out there. Familiarize yourself with the other charges that you might incur, before you apply for the loan. If you are applying for a home loan you can seek the services of Bajaj Finserv, who offer benefits like part prepayment facility and online account access.