How Simple Interest Can be Applied in Real-Life Situations

Simple interest describes the total amount needed for borrowing the money without including any compound interest. It is computed using three major factors: principal amount, real-time, and interest rate on the principal amount. It is widely used in various domains of daily life. Some everyday life examples of simple interest are automobile loans, loans on instalments, etc. The total amount of simple interest is demonstrated on the certificates of deposit provided by the banks or organisations. 

Interest 

Whenever any individual deposits money in the bank for a certain period, the bank provides some additional amount to the depositor after the completion of the year. This additional amount is the bank’s interest paid on the deposited amount. Similarly, when the individual borrows the money from the bank, the bank charges some percentage of interest as an additional amount on the principal amount. This amount is also called interest. It’s all about the simple interest. However, here we learn about simple interest and its application?

Simple Interest:

Simple Interest is the numerical value of interest on any principal amount. It mainly depicts the total money needed to borrow from banks and organisations. However, it is the simplest method of calculating the interest amount on the principal amount. Simple interest is mainly applied to the principal amount of the loan, which remains constant throughout time. 

It is calculated by using the formula, which is written below:

S.I. = (P × R × T) /100

In the above formula, 

P describes the principal amount. 

R describes the rate of interest 

T is the total period. 

Application of Simple Interest 

Simple interest is the simplest method of calculating the amount of interest on the principal. Hence, it is used widely by many banks and other organisations. Below listed are few applications of simple interest:

Bank loan

The loan is the amount of money that the individual borrows from banks. The banks apply simple interest on these loans, which individuals pay every year. The Bank cannot change the interest rate after providing the loan, and it will remain constant throughout. Simple 

interest consists of a specified percentage of the principal amount, which individuals must pay to the bank. It mainly depends on the principal loan amount, interest rate, and total time period of returning the loan. 

Car loan 

Car loans are paid every month. The individual who issued the car loan has to pay the EMI every month. The simple interest on the car loans is not constant throughout. When the individual pays EMI in car loans, the amount gets deducted from the principal amount. Thereafter, the simple interest gets calculated from the remaining balance of the principal amount. Thus, in such loans, the principal and interest rates simultaneously decrease. 

Certificates of deposit 

Certificates of deposit can be demonstrated as a type of investment that a bank makes. The banks or organisations fabricate it for paying a specified amount to the individual at a particular date. In this type of agreement, the loan taker needs to clear his whole loan in a specific period. It reduces the total amount of interest paid by the receiver.

For instance, if the person is taking out a loan of 1,00,000. The interest rate is 3%, and the period is one year. Then, he needs to pay the INR 3000 additional amount as simple interest. 

In contrast, if it gets specified up to 3 months. Then the individual only has to pay the INR 750 additional amount as simple interest. 

Consumer loan 

Many general stores provide expensive electronic appliances and other objects for simple interest. The period for such loans remains up to a maximum of one year. 

Simple interest is also used to perform various financial field calculations.

Conclusion 

Simple interest is widely used for performing various calculations in banks and financial organisations. It describes the total amount of money paid as interest on the borrowed amount. It is used for calculating the yearly or monthly interest of the principal amount taken by any individual. It is also used to calculate compound interest.