Having an understanding of the easiest way to calculate finance expenses is quite a helpful skill. The majority of lenders, help you out with this, but it’s better to be able to add up the numbers yourself.
The very first point you will find is that basically there’s two parts to a loan. The first factor is known as the principal. Essentially, this is the amount of money that has been borrowed. Since the lender’s biggest desire is to profit from his services, the second part is, of course, the interest. There are a lot of different types of interest, ranging from simple to variable. In this article, we’ll learn how to understand and calculate simple interest.
With simple interest offers, the interest rate, which is expressed as a percentage, doesn’t change throughout the loan. This is why it is also commonly known as flat-rate or fixed interest.
This is the simple interest formula:
Interest = Principal × Rate × Time
Interest being the total amount of paid interest.
Principal being the amount of money that was lent or borrowed.
Rate being the percentage of charged principal as interest each year.
To figure this out, the rate needs to be expressed as a decimal (meaning that percentages need to be divided by 100). For example, if the rate is 27%, then you need to use 27/100 or 0.27 within the formula.
And finally, time being how many years the loan is.
The simple interest formula can be abbreviated as such:
I = P x R x T
Math problems about simple interest are used for both borrowing and lending. This means that the same formulas are used to apply to both situations. When money is borrowed, the amount to be repaid to the lender is equal to the principal amount borrowed + the interest charge:
Total repayment = principal + interest
Typically, money is paid back in regular payments, most commonly monthly or weekly. In order to work out the regular payment amount, divide the total amount to be paid back by the amount of time (number of months or weeks) of the loan.
Here is an example :
A young man wishes to purchase a new car by obtaining a simple interest loan. The car costs $1200, and the interest rate for the loan is 10%. The loan for the car will be paid back in weekly repayments throughout a period of 2 years.
1. How much interest is paid over the 2 years?
2. What is the total amount to be repaid?
3. How much is to be repaid each week?
You were given: principal: ‘P’ = $1200, interest rate: ‘R’ = 10% = 0.1, repayment time: ‘T’ = 2 years.
Step 1: Work out the amount of interest paid.
Interest: ‘I’ = PRT
= 1200 × 0.1 × 2
Step 2: Figure out the total amount to be repaid.
Total repayments = principal + interest
= $1200 + $240
Step 3: Work out the amount to be repaid weekly.
Weekly payment amount = total repayments divided by loan period, T, in weeks. In this case, $1440 is divided by 104 (52 weeks in a year, 52 x 2) weeks equals $13.85 per week.
There you have it, calculating simple finance expenses can be quite easy once you have practiced a bit with the formulas.