Answer:
Step-by-step explanation:Understanding Simple Interest
Interest is the cost of borrowing money. Typically expressed as a percentage, it amounts to a fee or charge that the borrower pays the lender for the financed sum.
Simple interest is an easy way to look at the charge you'll pay for borrowing. The interest rate is calculated against the principal amount and that amount never changes. Neither compounding interest nor calculation of the interest rate against a growing total balance is involved.
That means you'll always pay less interest with a simple interest loan than a compound interest loan if the loan term is greater than one year.
Many debt transactions involve a more complex calculation of interest than simple interest.
Benefits of a Simple Interest Loan
Interest doesn't compound or get added to the principal amount for a larger borrowing cost result. You never pay interest on interest.
Borrowers can save money.
Debts can be easier to pay off.
The simple interest calculation is simple and straightforward.
Simple interest is better for borrowers because it doesn't account for compound interest. On the other hand, compound interest is a key to building wealth for investors.
Simple Interest Formula
The formula for simple interest is straightforward:
Simple Interest
=
�
×
�
×
�
where:
�
=
Principal
�
=
Interest rate
�
=
Term of loan, in years
Simple Interest=P×r×n
where:
P=Principal
r=Interest rate
n=Term of loan, in years
Example of Simple Interest
As a reminder, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent.
For example, let's say that a student obtains a simple interest loan to pay for one year of college tuition. The loan amount is $18,000. The annual interest rate on the loan is 6%. The term of the loan is three years.
Using the simple interest formula above, the amount of simple interest on the student's loan is:
$
1
8
,
0
0
0
×
0
.
0
6
×
3
=
$
3
,
2
4
0
$18,000×0.06×3=$3,240
Therefore, the total amount of principal and interest paid to the lender is:
$
1
8
,
0
0
0
+
$
3
,
2
4
0
=
$
2
1
,
2
4
0
$18,000+$3,240=$21,240