Simple interest calculator: What it is and how it works
Money borrowed from commercial banks comes at a cost. This extra amount of money that a borrower has to pay back is known as interest, and the original sum is called principal. And the rate at which a customer borrows money from the bank is known as an interest rate.
A simple interest calculator is a utility tool used to calculate interest on a loan without compounding — or interest without any interest on interest, known in accounting parlance as compound interest. A typical simple interest calculator comes with a formula box where the user is required to enter details such as the principal amount, the time period for which interest needs to be calculated, and the rate of interest.
Simple interest calculators often enable calculation in multiple intervals, such as yearly, monthly, weekly or daily.
Here’s how a simple interest calculator work
A simple interest rate calculator has a formula box, as described above.
The inputs entered here are used in the mathematical formula: A = P (1+rt), where 'A' means the final amount, 'P' means principal, 'r' means rate of interest and 't' means time period. The amount A here is the total accrued amount that is payable by the borrower at the end of the loan term. This amount is arrived at by adding the simple interest amount to the principal amount.
The simple interest calculator displays the result (A) after the user feeds these details in the given fields.
Simply put, the accrued or total amount is the total amount the borrower has to return to the lender, including the loan amount as well as the applicable interest (depending on the rate of interest and the time period).
Here’s how to find simple interest
To find the interest amount, the user must subtract the principal amount from the total amount.
Here is the formula: A-P
The result is the amount of interest (without compound interest, or interest on interest).
Understanding the concept of simple interest by an example
Suppose a loan of Rs 20,000 is taken for a period of six years at a rate of 10 percent.
By feeding these details, the simple interest calculator returns Rs 32,000 as the total amount (A).
Now, the amount of money paid as simple interest in this case is Rs 12,000 (Rs 30,000 - Rs 20,000).
This means that the borrower has to pay a total sum of Rs 32,000 to the lender after the loan period of six years at 10 per cent.
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