What is Simple Interest?
Simple interest is a method of calculating the interest charge on a loan or bill. Simple interest is determined by multiplying the interest rate by the principal by time which is normally in years (per annual) but could be in months, days, weeks etc during the specified time frame.
Simple Interest (S.I.) = (P x r x t) / 100
Where P stands for Principal, r stands for interest rate and t stands for time.
How to Solve and Apply Simple Interest.
There are a number of different reasons that could make one want to carry out a simple interest operation. One of them being that you want to lend money to your friend to start a business and you want your money to work for you and reproduce during the course of the loan.
So, let’s take for example, You have a friend, Peter and he begs you to give him a loan of $10,000 to start a business with a simple interest rate of 3% for a period of 2 years. It is now your job to figure out how much your $10,000 would generate for you after 2 years if you lend your money to Peter. If it is not favorable to you. You can either decline or ask for a higher simple interest rate.
Now to do this calculation, you would have to outline your parameters
From the offer, you have that the Principal is $10,000, interest rate is 3%, and the time or duration for the loan is 2 years.
Therefore, S.I. = ($10,000 x 3 x 2) / 100 = ($60,000) / 100 = $600
This means that if you make a deal with Peter after 2 years, your interest is $600 and the total amount of money you would receive from Peter is $10,000 + $600 which is $10,600.
So, you see knowing how to solve simple interest can help you strike amazing deals now. You would likely reject this offer, I guess or ask for a higher rate.
Assuming, you want to really strike a deal with Peter you would have to counter his contract by offering the interest rate you seem comfortable with. Let’s say, you want an interest of $5,000 from the deal Peter offered, you would now have to find the interest rate to work with.
You already know that,
S.I. (I) = (P x r x t) / 100
Making r the subject of the formula, we have:
r = (I x 100) / (P x t)
You want your interest to be $5,000, the time is 2 years and the principal is $10,000
r = ($5,000 x 100) / ($10,000 x 2) = (500,000) / (20,000) = 25%
Wow, Peter would probably be shocked when you negotiate at this interest rate but that is what you comfortably want to get from Peter in a time span of 2 years.
Now assuming, Peter decides that the threshold interest rate he can go for is 10% and you do not have to worry about how long it would take as far as you get double your money back which is $10,000.
You would now have to calculate the time in years it would take to have double your money.
You know generally that:
(S.1.) I = (P x r x t) / 100
Making t the subject of the formula, We have:
t = (I x 100) / (P x r)
I which is your interest is $10,000, the simple interest rate given to you by Peter is 10%, and the principal is $10,000.
t = ($10,000 x 100) / ($10,000 x 10) = 10 years
Therefore, if you accept Peter’s deal of an interest rate of 10% and a loan of $10,000 from you. You will get double your money in 10 years. Cool right?
After a long day thinking about Peter’s proposal, you got home and now started thinking how much can I lend to someone at an interest rate of 10% for 6 months that would give me $10,000?
That’s why I love mathematics, it has the answers to a lot of questions.
You already know that:
(S.I.) I = (P x r x t) / 100
Making P the subject of the formula:
P = (I x 100) / (r x t)
You already have in mind that you want your interest to be $10,000. Therefore, I = $10,000
Since, Simple Interest Calculations is majorly i year(s). 6 months is equivalent to 6/12 years which is 0.5 years. Therefore, t = 0.5 years and your rate is 10%.
P = ($10,000 x 100) / (10 x 0.5) = ($1,000,000) / 5 = $200,000
Wow, that’s a huge sum of money, well you have a large interest in just 6 months. No wonder all these rich fellas are always having money. All they need to do is lend large sums of money and get huge interests in a short or long amount of time as they deem fit.