Today we will be 'Starting Simple', by discussing simple interest. While simple interest is not used in many commercial settings anymore, it is important to understand the concept. Interest is the excess charged on a loan to compensate for risk. Simple interest or 'flat rate' interest is only based on the principle so it has a linear relationship with time. More complicated interest types such as compound interest (where interest is charged on interest) will be discussed next week.
To figure out the interest on a loan using simple interest, use the following formula:
Interest = Principle x Rate x Time
Abbreviated to:
I = P x R x T
Where:
I = Interest on loan
P = Principle of the loan
R = Rate of Interest per time period
T = Number of Time periods (Often done annually)
