simple interest

Interest calculated on the original amount only is known as simple interest.

It’s different to compound interest which is calculated on the whole amount.

Simple interest is usually calculated once a year, every year.

There are two ways in which simple interest can be paid:

(1) Putting money in the bank which means that the bank pays simple interest to you.

(2) Borrowing money from the bank which means that you must pay simple interest to the bank.

For example, Raj wants to borrow money to buy a new computer.

His bank is willing to lend him £200 at a rate of 5% over a period of 3 years.

We calculate the simple interest that Raj will have to pay back to his bank like this:

5% × £200 × 3 years
0.05 × 200 × 3 = 30

Therefore, after 3 years, Raj will have to pay £200 + £30 = £230.