Calculating simple interest requires using the formula I = P*r*t, in which I=interest, P= principal, r=rate and t=time. Knowing the other elements of the formula makes calculating the interest due on a particular loan simple, according to About.com.Continue Reading
If a loan or investment involves a $5,000 initial principal, an interest rate of 6 percent, and a term of 12 years, calculating simple interest owed involves multiplying the three numbers together. In the case of a percentage, multiplying by 6 is not correct; instead, it is correct to use 0.06, as 6 percent really means 6/100. So multiplying 5000, 0.06 and 12 yields an answer of $3600. This indicates the simple interest that one would obtain through that investment scenario or the loan that is under consideration.
In situations that involve fractions of a year, it is possible to alter the formula in order to get the desired answer. For example, when calculating interest after nine months with an annual interest, the number to use for the "t" would be 0.75 (9/12 = 3/4 = 0.75). Calculating the interest after 325 days would make the number to use 325/365. Understanding the simple interest is helpful for making financial decisions for investments and loans.Learn more about Financial Calculations