Borrowing or lending money is common these days. It eases the financial pressure to buy assets. But loaning money comes with a cost called simple interest. The amount that you borrow for some time is the principal and the cost at which you borrow this principal amount is the rate of interest. The total extra amount that you pay in addition to the principal amount is the interest. Simple interest does not take into consideration the power of compounding. Hence, the amount of interest you pay in each installment through the loan tenure stays constant as there is no interest charged on the interest.
You can calculate the simple interest that you earn or have to pay using the simple interest calculator. It is a web-based tool that calculates the simple interest that you pay on a daily or monthly or yearly basis when borrowing or lending a particular principal amount for a specific time. The simple interest rate calculator reflects the total amount that you have to pay or receive along with the interest bifurcation when you borrow or lend money.
It is easy to compute simple interest. You can also do it manually. But human errors may creep in while you do the arithmetic of the formula. The better route is to calculate simple interest online. The dynamic web-based Simple Interest Calculator will give you the result in seconds. It uses a mathematical formula to find simple interest on the principal amount by factoring in the decided rate of interest and the number of years for which the principal is borrowed.
Total Payable Amount = Principal Amount * [1 + (Rate of Interest * Number of Years)]
The number of years is the duration of the loan tenure. And the total payable amount is the accrued amount which included the principal amount and the interest amount. In other words, the Simple Interest is the difference between the total amount and the principal.
Thus, the Simple Interest Formula online is,
Simple Interest = Total Payable Amount - Principal Amount
For example, let’s assume the principal amount is Rs 1000, the interest rate is 10% and the loan tenure is 5 years. Here, the simple interest calculation will be as follows,
Total Payable Amount = 1000 (1+0.1*5) = Rs 1500
Simple Interest = Rs. (1500 – 1000) = Rs 500
You can use this calculator to understand the time value of money. It will also help you to determine how much you end up paying or receiving when you borrow money or advance a loan to someone respectively. You can weigh investment based on your returns using the concept of Simple Interest if you invest in an interest-based investment.
Where is the concept of Simple Interest used?
The concept of Simple Interest is used widely. Some of the scenarios are:
Decoding the Simple Interest formula with an example
Understanding how the Simple Interest formula works is necessary. As mentioned, the formula is widely used for loan and investment calculations. You should be aware of the interest liability you incur or the returns you will make. It aids in better financial planning. Read on to learn how the Simple Interest concept works.
Interest calculation
Let’s suppose you wish to take a loan of Rs 1 lakh for a tenure of 1 year at an interest rate of 7%. If you are wondering what your interest liability will be, use the below-mentioned Simple Interest formula to calculate.
SI = (P x R x T)/ 100
The formula variables stand for as follows:
Now substitute variables in the given formula to calculate your interest liability:
SI = (1,00,000 x 7 x 1)/ 100 = 7,000
As the calculations indicate, you are liable to pay an interest of Rs 7,000 on the loan amount.
Total amount calculation
The above-mentioned amount is merely the interest liability you incur on the loan amount. Now if you calculate the total amount you need to pay, use the following formula:
A = P + (P x R x T)/100
On substitution you will obtain the following equation:
A = 1,00,000 + 7,000 = 1,07,000
As the calculations indicate the total loan will cost you Rs 1,07,000. Note, loan processing fees and other charges will be added to this total amount. These fees and charges differ from bank to bank and are also based on the loan amount you avail. Reach out to your bank for more specific details.
In the above example, the most basic variables were used to explain the usage of the Simple Interest formula. However, as more significant variables are used calculations may become complex. But you need not worry. The Simple Interest calculator simplifies calculations for you. Just feed in the variables in the calculator and it will provide you with accurate results within minutes.
How to use the ICICI Direct Simple Interest calculator?
Using the ICICI Direct Simple Interest calculator is very easy. You just need to enter key variables in the calculator to obtain results.
You can easily set all three variables using the sliders. Moving the slider to the left helps you reduce the variable’s value. Moving the slider to the right side helps you increase the variable’s value.
On entering all the variables, the calculator will come up with accurate results in no time. The calculator will provide you with the total maturity amount, principal amount, and total interest. A graphical representation in the form of a pie chart will also be provided. This will give you a better understanding of the calculation.
Difference between Simple Interest and Compound Interest
Simple Interest and Compound Interest are very different from each other. While in Simple Interest, the interest amount stays the same throughout the tenure of the loan, Compound Interest takes into consideration the power of compounding through the tenure of the loan which means it charges interest on interest. Both formulas are very simple and can be calculated using an online calculator as well.
Following is a table to highlight key differences between Simple and Compound Interest:
|
Point of difference |
Simple Interest |
Compound Interest |
|
Formula |
SI= (P x T x R)/ 100 |
CI = P (1 + R/100)t – P |
|
Calculation |
It is calculated only on the principal amount borrowed, lent, or invested. |
The interest earned or unpaid is added to the principal amount to calculate compound interest. |
|
Total interest |
The interest calculated is comparatively lower. |
The interest calculated is higher than that of Simple Interest. |
|
Benefitting party |
Simple Interest calculation method is beneficial when you are getting a loan as your interest liability will be lower and affordable. |
Compound Interest calculation method is beneficial for lending and investment purpose. You earn a higher interest value. |
The key benefit of this tool is the accurate simple interest rate calculation that it delivers. You can try changing the variable data points in it end number of times, but the results it reflects each time will be 100% accurate
The results of the Simple Interest calculation that you receive from this tool are instantaneous. It is only a matter of a couple of clicks within which you will get your complete information. This especially helps in saving a lot of time when you have to calculate and compare borrowers or investments based on interest that you have to pay or receive respectively. You can also make informed decisions about investments and borrowings after comparisons between the compound interest and the simple interest that you will tabulate through this calculator.
This calculator is a web-based tool that is available without any cost by several banks, financial institutions, etc.
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The cost that you pay in addition to the principal amount for borrowing money after factoring in a certain rate of interest for a particular period is the simple interest. It does not take into consideration the power of compounding. Hence, the amount of interest you pay in each installment through the loan tenure stays constant as there is no interest charged on the interest.
A Systematic Investment Plan (SIP) is an organized way to spread your investment amount over time through regular fixed instalments. On the other hand, a lumpsum investment means depositing the entire chunk of money one time for some time.
Lumpsum investments should be preferred when you have a large chunk of money at hand that needs to be invested. The source of this chunk could be years of accumulated saving, inheritance, a gift, sale proceeds from an asset/s, etc. A big-ticket investment combined with the right market timing can prove to be very profitable for a lumpsum investment.
Typically, Mutual Funds that have provided a high-yielding profit history are popular for Mutual Fund Lumpsum payments. You can take maximum advantage of the Mutual Fund scheme by investing your chunk at the right timing in the market.
You can gather an amount significant enough to be a Lumpsum payment and deposit it as the principal amount in a Mutual Fund scheme of your choice.
SIP as well as Lumpsum payment both have their fair share of benefits. A lumpsum investment does not require you to keep track of the NAV, instalment amount, and the time when the investment is to be done. SIPs inculcate financial disciple and make use of every market scenario throughout the investment.
A Mutual Fund Lumpsum Investment is when you invest your entire amount in a particular mutual fund scheme for some time (1 year, 3 years, etc.).
Anyone can invest a bulk amount in Mutual funds. Since lumpsum means one-time payment, the eligibility criterion is the minimum amount that can be invested in Mutual Funds. This varies from fund to fund, but generally, Rs. 5000 is the eligibility to invest a lumpsum amount
There is no upper limit on the amount that can be invested in a lumpsum Mutual Fund.
You can calculate simple interest on a principal amount certain rate of interest for a particular period using simple interest calculators. It helps you to determine the simple interest that you pay on the principal amount as well as the total amount payable that is accrued over time.
No, interest rates on principal amount do not change over time in Simple Interest. This is because Simple interest does not take into consideration the power of compounding. Hence, the amount of interest you pay in each installment through the loan tenure stays constant as there is no interest charged on the interest.
The Rate in Simple Interest is the percentage at which you are annually charged over your principal amount for borrowing the principal amount for a specific period.
Compound Interest takes into consideration the power of compounding through the tenure of the loan. This means it charges interest on interest and so the interest installments are not the same over time. While in the case of Simple Interest, there is no compounding factor, hence the interest amount stays the same throughout the tenure of the loan.
Simple Interest can make you understand the time value of money. It helps you to understand how much you end up paying or receiving when you borrow money or advance a loan to someone respectively. You can also understand your returns using the concept of Simple Interest if you invest in an interest-based investment.
In case you are investing money and are going to gain simple interest returns, you will receive the Simple interest only on the principal amount that you invest, whereas in compound interest, you gain interest on interest. This aspect of Simple Interest which does not factor in the compounding element is its limitation.
Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. Please note, loans related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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