How to calculate simple interest, with examples

Steps

1. Write down the principal, the yearly rate and the time in years. Here: ₹1,00,000, 8% and 3 years.
2. Multiply them: 1,00,000 × 8 × 3 = 24,00,000.
3. Divide by 100: 24,00,000 ÷ 100 = ₹24,000. That is the simple interest.
4. Add it to the principal for the total amount: 1,00,000 + 24,000 = ₹1,24,000.
5. Or enter the three numbers in the simple interest calculator, which also shows the interest for each year.

Finding the rate, the time or the principal

The formula can be turned round. The rate is R = interest × 100 ÷ (P × T): ₹24,000 earned on ₹1,00,000 over 3 years gives 24,000 × 100 ÷ (1,00,000 × 3) = 8%. The time is T = interest × 100 ÷ (P × R), which is 24,000 × 100 ÷ (1,00,000 × 8) = 3 years.

For a part of a year, turn the months into years first. 9 months is 0.75 years, so ₹1,00,000 at 8% for 9 months earns 1,00,000 × 8 × 0.75 ÷ 100 = ₹6,000.

Simple interest compared with compound interest

Simple interest is charged on the original principal only, so it adds the same amount every year. Compound interest is charged on the principal plus the interest already added. At 8% for 3 years on ₹1,00,000, simple interest gives ₹24,000 while yearly compounding gives ₹25,971. The gap grows with time: over 20 years at 10%, simple interest is ₹2,00,000 while compounding earns ₹5,72,750.

Where simple interest is used

Some short-term loans, personal lending between people, a few bonds and many school-level exercises use simple interest. Bank deposits and most loans compound, and an EMI loan is a reducing-balance loan, not a simple-interest one. Check the terms to see which kind applies before relying on the answer.