Table of Contents
- About the simple interest calculator
- How to use the simple interest calculator?
- What is simple interest?
- What is the difference between simple interest and compound interest?
- How to calculate simple interest?
- Advantages and disadvantages of simple interest
- Example of simple interest
- Frequently asked questions about the subject
About the simple interest calculator
Our free online simple interest calculator will help you estimate how much your money could earn in a simple interest investment. With this, you can make the best decision for simple interest application and simulate without commitment.
As you continue reading, you will have the answers to the following questions:
- How to use the simple interest calculator?
- What is simple interest?
- What is the formula to calculate simple interest?
- What is the difference between simple interest and compound interest?
How to use the simple interest calculator?
Fill in the form fields according to the following description:
- Initial value: The initial amount of your deposit;
- Interest rate: The interest rate that will be levied on the deposit amount (can be set as monthly or annual rate);
- Period: The period of time your application will be earning interest (can be set in months or years).
All fields are mandatory, fill them in and click on the 'Calculate' button to view the calculated result.
Click on 'Clean' if you want to clear the form fields to make new calculations.
What is simple interest?
Simple interest is the remuneration charged for the loan of values, in this modality it is calculated a percentage (rate) on the amount that is borrowed and the borrower (who receives the loan) is in charge of paying the borrowed amount plus the interest calculated at the end of the period.
To better illustrate, let's imagine the following situation, imagine that you lent $1,000.00 to a friend at a rate of 1% per month to be paid within 12 months. Every month you will receive from your friend, in addition to the principal amount, the amount of $10.00 of interest because 1% of 1,000.00 is 10.00. Note that in the interest mode simple, the amount of interest remains the same, unlike the compound interest.
What is the difference between simple interest and compound interest?
In the simple interest modality, the interest income will always be the same until the end of the loan period, for this is called simple interest, for the simplicity of its calculation.
In compound interest, or interest on interest, the yield calculation is different because yields are added to the starting amount for the next income and so on until the deadline.
How to calculate simple interest?
The formula for calculating simple interest is:
Fv = Iv (1 + i . t)
where
- Fv: The final value at the end of the periods
- Iv: The initial value
- i: The interest rate
- t: The time or number of periods
Discover our basic calculator to calculate simple interest following the formula above.
Advantages and disadvantages of simple interest
Simple interest is a basic form of interest calculation in which the rate is applied only to the initial amount, without considering accrued interest. Although less complex than compound interest, simple interest is still widely used in some financial situations. In this section, we'll cover the advantages and disadvantages of simple interest.
- ADVANTAGES:
- Easy to calculate: As simple interest is calculated only on the initial amount, the calculation is simple and straightforward, without the need to consider accrued interest or time periods.
- Less risks: Simple interest is a safer option in situations where there is no certainty when the money will be paid back. As the rate is applied only to the initial amount, the risk of financial loss is lower than with compound interest.
- More predictable: Since simple interest does not take into account the accrued amount of interest, it is easier to predict how much interest will be paid over the loan or investment period.
- DISADVANTAGES:
- Lower return: As simple interest is calculated only on the initial amount, the financial return is lower compared to compound interest.
- Does not take inflation into account: Simple interest does not consider inflation, which can result in a financial loss for the investor.
- Do not encourage long-term investment: As the financial return is lower compared to compound interest, simple interest does not encourage long-term investment, which can lead to a loss of investment opportunities.
Simple interest has its advantages and disadvantages, depending on the financial situation in which it is used. It is important to understand the differences between simple interest and compound interest before making a financial decision. Be sure to carefully consider your financial goals before choosing between simple and compound interest.
Example of simple interest
Let's imagine an example where Joseph borrowed $100.00 from Karen to be paid in 3 months at a rate of 5% per month in simple interest. Let's see what the account would look like:
Fv = 100 (1 + 0.05 . 3)
Fv = 100 (1 + 0.15)
Fv = 100 . 1.15
Fv = 115
Joseph must pay Karen $115 divided into 3 installments.
Note: In the formula, the interest rate must be divided by 100.
Frequently asked questions about the subject
Can I use the simple interest calculator to calculate loans or financing?
Yes, the simple interest calculator can be used to calculate the amount of interest in loans or financing with simple interest. However, it's important to note that most loans and financing use the compound interest system, which can result in higher interest amounts.
Is it possible to use the simple interest calculator for investments?
Yes, the simple interest calculator can also be used to calculate the return on investments that use simple interest, such as some fixed-income bonds. However, it's important to remember that the most common investments use the compound interest system, which tends to generate higher returns in the long run.
What is the formula to calculate simple interest?
The formula to calculate simple interest is: interest = principal x interest rate x time.
Can I calculate simple interest with fractional periods?
Yes, you can calculate simple interest with fractional periods. In that case, the time should be converted into a fraction of a year (for example, 6 months is equivalent to 0.5 years).
How can I use the simple interest calculator to plan an investment?
You can use the simple interest calculator to determine how much interest you can earn on an investment based on the initial amount, interest rate, and time. With this information, you can evaluate if the investment is worthwhile and fits into your financial strategy.
Can I use the simple interest calculator to calculate the final value of an investment?
No, the simple interest calculator is designed to calculate only the amount of interest in an investment. To calculate the final value of an investment, you need to take into account the initial amount, interest, and other factors such as fees and taxes.
Can the simple interest calculator be used for loans as well?
Yes, the simple interest calculator can be used to calculate the interest on a loan. Just enter the loan amount as the principal and the interest rate applied by the lender to obtain the amount of interest that will be charged.
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