Simple Interest Definition

A Interest is the amount paid by someone who borrows a certain amount of money. This term is commonly used in banks, loans, installments and investments. It is associated with percent, rate and the length of time, for which the amount of money is borrowed.

There are many types of interest that can be applied. Simple interest is the simplest and most common type of interest. This type of interest is applicable for a short-term duration, usually in days, weeks, months or even a few years with not so large amounts of money.

Terms to remember

Borrower - the person who is receiving the amount and will be paying back the same amount with the interest on the required date or time period.
Lender - the person who is giving the amount which has to be paid on the required date or time period.
Loan - temporary borrowing of money which is to be paid after a certain period of time.
Percent - one part in a hundred.
Ex. 10%

Factors of Simple Interest

There are only 3 common factors to be considered with regards to simple interest.

1. Principal

This is the amount of money being borrowed.This could be loaned from a bank or any loaning establishment or borrowed from a person. This will be the basis of how much will be paid with the additional compensation for borrowing.

2. Rate of Interest

This is the percent to be used to calculate the additional amount to be paid along with the principal. Common rates of interest ranges from 1 to 10% but it can also be higher depending on the agreement between the parties.

3. Time

This is the period from the beginning when the money was borrowed to the period that when the money should be returned with the additional amount (interest). This can also be called a term or deadline. This should properly and strictly be observed especially in huge amount of loans.

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