Formula to Calculate Simple Interest (SI)

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Here, interest is calculated only on the amount initially invested, and there is no interest in interest as the case with compound interest formula. It finds its usage in car loans and other consumer loansConsumer LoansA consumer loan is a type of credit given to a consumer to finance specified set of expenditures. The borrower must pledge a specific asset as collateral for the loan, or it may be unsecured depending on the loan’s monetary value.read more extended by banks and financial institutions. Also, the interest paid on savings bank accounts and term deposits by banks is also based on simple interestSimple InterestSimple interest (SI) refers to the percentage of interest charged or yielded on the principal sum for a specific period.read more.

Examples

Example #1

ABC lends $5000 at 10% per annum for five years. Calculate the simple interest and total amount due after five years.

Principal: $5000

Interest Rate: 10% per annum

Time period (in years) = 5

So now we will do the calculation this using the simple interest equation i.e

  • Simple Interest = Principal * Interest Rate * Time PeriodSimple Interest =$5000 * 10%*5=$2500

Total Simple Interest for 5 years= $2500

Amount due after five years=Principal + Simple Interest

  • = $5000+$2500Amount due after five years = $7500.

Example #2

Ravi purchased a microwave oven from an electronics store priced at Rs 10000. He financed the same from its lender, HDFC bank. Details are as follows:

loan amount: Rs 12000

loan period: 1 year

interest: 10% per annum

The frequency of payment: monthly

We can calculate the equated monthly amount in excel using the PMT functionUsing The PMT FunctionThe PPMT function in Excel is a financial function that calculates the payment for a given principal and returns an integer result. This function can be used to calculate the principal amount of an installment for any period.read more.

Accordingly, the EMI amount Ravi will have to pay comes out to rs 879.16 (which includes both interest and principal amount). We can observe from the below amortization schedule of the mortgage that the interest amount kept decreasing with each payment and the principal amount kept increasing; however, the monthly installment remained the same across the tenure of the loan.

Important Points to Note when calculating simple interest:

  • The period must be in years. If the same is in a month, it should be converted into years as a fraction.The interest rate must be expressed annually, but if the period is less than a year, it must be adjusted for one year. For instance, if the interest rate is 12% per annum, but the problem pertains to the monthly interest rate, then it will be 1% (12%/12).

Example #3

Ram took a car loan of $500000 from HDBC Bank, where interest is payableInterest Is PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.read more at 10% for 24 months. The loan is to be repaid by making equal monthly payments of $23072.46 (calculated using the PMT functionPMT FunctionPMT function is an advanced financial function to calculate the monthly payment against the simple loan amount. You have to provide basic information, including loan amount, interest rate, and duration of payment, and the function will calculate the payment as a result.read more in Excel)

The Schedule of payments calculated using SI formula in excel is as follows:

Let’s understand the concept of SI formula in excel using one more industry example related to Certificate of Deposits (CD)Certificate Of Deposits (CD)A certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period.read more.

Example #4

ABC Bank subscribed to the certificate of deposits totaling $20000 issued by the government of India, which carries a 5% interest per annum. The certificate of deposits matures in 6 months.

Interest earned by ABC Bank on the certificate of deposits:

Simple Interest= Principal * Rate* Time period

Thus, ABC Bank will earn a total interest of $500 on the certificates of deposits on maturity, i.e., after six months.

Simple Interest Calculator

You can use the following Simple Interest Calculator.

Relevance and Uses

  • Simple interest finds its relevance in the way interest is calculated by Banks on the savings bank account and term deposits held by depositors. Banks normally calculate interest every quarter in savings and term deposits.Returns calculated under simple interest will always be less than returns calculated under compound interest as it ignores the concept of compounding.SI formula ensures that the interest portion is higher in the Initial years and subsequently reduced as the tenure of the loan progresses.It calculates interest on short-term loans like car loans, certificates of deposits and savings accounts, and term deposits.

Simple Interest Formula Video

This has been a guide to the Simple Interest Formula. Here we learn how to calculate simple interest along with some practical examples. Here we also provide a Simple Interest Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

  • Compound Interest ExamplesCompound Interest ExamplesTo calculate the compound interest in excel, the user can use the FV function and return the future value of an investment. To configure the function, the user must enter a rate, periods (time), the periodic payment, the present value. Compound interest formula = FV(rate,nper,pmt,pv)read moreMonthly Compound Interest FormulaMonthly Compound Interest FormulaMonthly compound interest refers to the compounding of interest every month, which implies that the compounding interest is charged both on the principal and the accumulated interest.read moreDifferences between Mortgage APR vs Interest RateDifferences Between Mortgage APR Vs Interest RateThe mortgage APR measures the mortgage cost, including the interest rate and other costs like discount points, broker fees, and closing costs in percentage terms. In contrast, an interest rate is the borrowing cost of the principal, that is, the loan amount, which can be either fixed or variable.read moreImputed InterestImputed InterestImputed Interest is an interest inferred by the government for a particular set of transactions that involve payment made to someone by someone who essentially bears the nature of loan without charging interest or charging at a much lower rate than imputed interest where such interest is used to calculate the tax to be set on such transaction.read more