Interest Rate Formula - What is Interest Rate? Examples (2024)

FAQs

Interest Rate Formula - What is Interest Rate? Examples? ›

= P × R × T, Where, P = Principal, it is the amount that initially borrowed from the bank or invested. R = Rate of Interest, it is at which the principal amount is given to someone for a certain time, the rate of interest can be 5%, 10%, or 13%, etc., and is to be written as r/100.

For example, if a savings account is to pay 3% interest on the average balance, the account may award 0.25% (3% / 12 months) each month. The applicable interest rate is then multiplied against the outstanding amount of money related to the interest assessment. For loans, this is the outstanding principal balance.

If you take out a $300,000 loan from the bank and the loan agreement stipulates that the interest rate on the loan is 4% simple interest, this means that you will have to pay the bank the original loan amount of $300,000 + (4% x $300,000) = $300,000 + $12,000 = $312,000.

Simple Interest is calculated using the following formula: SI = P × R × T, where P = Principal, R = Rate of Interest, and T = Time period. Here, the rate is given in percentage (r%) is written as r/100. And the principal is the sum of money that remains constant for every year in the case of simple interest.

"Simple" interest refers to the straightforward crediting of cash flows associated with some investment or deposit. For instance, 1% annual simple interest would credit $1 for every $100 invested, year after year.

To put it simply, interest is the price you pay to borrow money — whether that's a student loan, a mortgage or a credit card. When you borrow money, you generally must pay back the original amount you borrowed, plus a certain percentage of the loan amount as interest.

Interest, in the financial sense of the word, can be defined as the cost of borrowing money. If you take out a loan from the bank, for example, they will charge you interest on that loan. The amount of interest charged depends on many different factors like credit score, type of loan, etc.

Interest formula for simple interest: I = Prt where I is the total amount of interest accrued; over t time periods at a simple interest rate, r, and where the original amount invested or borrowed is P. Principal: The principal is the original amount invested or borrowed.

To calculate interest rates, use the formula: Interest = Principal × Rate × Tenure. This equation helps determine the interest rate on investments or loans. What are the advantages of using a loan interest rate calculator?

For example, suppose a person goes to the bank and opens a simple-interest savings account with $2,000 and does not deposit any more money or withdraw any money over the period of a year. If the account is set up with a 10% nominal rate, the bank will pay $2,000 (0.10) (1), or $200, at the end of one year.

What is the formula for rate? ›

However, it's easier to use a handy formula: rate equals distance divided by time: r = d/t. Actually, this formula comes directly from the proportion calculation -- it's just that one multiplication step has already been done for you, so it's a shortcut to learn the formula and use it.

Monthly Payment = (P × r) ∕ n

Again, “P” represents your principal amount, and “r” is your APR. However, “n” in this equation is the number of payments you'll make over a year. Now for an example. Let's say you get an interest-only personal loan for $10,000 with an APR of 3.5% and a 60-month repayment term.

For example, assume you have a car loan for $20,000. Your interest rate is 4%. To find the simple interest, we multiply 20000 × 0.04 × 1 year. So, by using simple interest, $20,000 at 4% for 5 years is ($20,000*0.04) = $800 in interest per year.

If you have a 6 percent interest rate and you make monthly payments, you would divide 0.06 by 12 to get 0.005. Multiply that number by your remaining loan balance to find out how much you'll pay in interest that month.

Mortgage interest rate example

With a 30-year mortgage for $320,000 at a fixed rate of 6.75 percent, your monthly payment would be $2,076. This sum excludes homeowners insurance, property taxes and any HOA fees, which are often included in monthly payments as well.