How to Use the Simple Interest Formula

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, you have $4,500.00 to invest (or borrow) with a rate of 9.5 percent for a six-year period of time.

Calculating Interest Earned When Principal, Rate, and Time Are Known

Calculate the amount of interest on $8,700.00 when earning 3.25 percent 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

Suppose you want to borrow $6,300 from March 15, 2004, until January 20, 2005, at a rate of 8 percent. The formula will still be I = Prt; however, you need to calculate the days.

To do so, do not count the day the money is borrowed or the day the money is returned. To determine 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 at 12.5 Percent for 261 Days?

Once again, apply the formula:

I = Prt

You have all the information you need to determine the interest in this question. Remember, 261/365 days is the calculation for t = time.

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

What amount of principal will earn interest of $175.50 at 6.5 percent in eight months? Once again, use the derived formula of:

I = Prt

which becomes:

P = I/rt

Use the example above to help you. Remember, eight months can be converted to days or you can use 8/12 and move the 12 into the numerator in the formula.

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

As above, use the derived formula of:

I = Prt

which will be:

P = I/rt

In this case, you have 300 days, which will look like 300/365 in the 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 to Earn $122.50 in 14 Months?

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, as follows:

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.