How to Use the Simple Interest Formula

A printout of information on interest rates
If you know the principal, rate, and time, it's easy to calculate simple interest. Glow Images, Inc. / Getty Images

Calculating simple interest or the amount of principal, the rate, or the time of a loan can seem confusing, but it's really not that hard! Here are examples of how to use the simple interest formula to find one value as long as you know the others.

Calculating Interest: Principal, Rate and Time Are Known

When you know the principal amount, the rate and the time. The amount of interest can be calculated by using the formula: I = Prt.

For the above calculation, we have $4,500.00 to invest (or to borrow) with a rate of 9.5% for a 6-year period of time.

Calculating Interest Earned When Principal, Rate and Time Are Known

Calculating Interest

Calculate the amount of interest on $8,700.00 when earning 3.25% per annum for three years. Once again, you can use the I = Prt formula to determine the total amount of interest earned. Check with your calculator.

Calculating Interest When the Time Is Given in Days

Calculating Interest

Let's say you want to borrow $6,300.00 from March 15th, 2004 until January 20th, 2005 at a rate of 8%. The formula will still be I = Prt, however, you need to calculate the days.

To do so, you will not count the day the money is borrowed or the day the money is returned. Let's figure out the days: March = 16, April = 30, May = 31, June = 30, July = 31, August = 31, September = 30, October = 31, November = 30, December = 31, January = 19. Therefore the time is 310/365. A total of 310 days out of 365. This is entered into the t for the formula.

What is the Interest on $890.00 at 12.5% for 261 Days?

Calculating interest

Once again, you can apply the formula I = Prt. You have all the information you need to determine the interest on this question. Remember, 261/365 days is the calculation for t = time.

Find the Principal When You Know the Interest, Rate, and Time

Calculating interest

What amount of principal will earn interest of $175.50 at 6.5% in 8 months? Once again you can use the derived formula of I = Prt, which becomes P = I/rt. Use the example above to help you. Remember, 8 months can be converted to days or, I can use 8/12 and move the 12 into the numerator in my formula.

What Sum of Money Can You Invest for 300 Days at 5.5% to Earn $93.80?

Calculating interest

Once again you can use the derived formula of I = Prt which will be P = I/rt. In this case, we have 300 days which will look like 300/365 in our formula, remember to move the 365 into the numerator to enable the formula to work. Get out your calculator and check your answer with the solution above.

What Annual Interest Rate is Needed for $2,100.00 to Earn $122.50 in 14 Months?

Calculating interest

When the amount of interest, the principal and the time period are known, you can use the derived formula from the simple interest formula to determine the rate. I = Prt becomes r = I/Pt. Remember to use 14/12 for time and move the 12 to the numerator in the formula above. Get your calculator and check to see if you're right.

Edited by Anne Marie Helmenstine, Ph.D.