If
calculating interest gives you nightmares, then this post is definitely for you, where we discuss the basics of Simple Interest and Compound Interest along with
some examples.
Questions
on how to calculate interest, both simple interest and compound interest,
always find their way in competitive exams such as SBI PO,IBPS, SSC Exam.
Having a thorough understanding about this concept will help you score more and save time.
Let’s
start with discussing the basic idea of Simple Interest and Compound Interest
along with different methods used to solve questions based on them.
What
is Interest?
Interest
can be defined as the money paid at regular time intervals, at a particular rate
for the use of lending cash, or for delaying the repayment of a debt.
It is
the extra amount earned or paid over the money lent or borrowed.
Before
we discuss about how to calculate interest, let us see what are the different
parameters that affect interest.
Elements
of Interest.
How
to Calculate Interest Using the Formula
There
are two ways in which interest is calculated Simple Interest and Compound
Interest.
1.Simple
Interest.
Simple Interest can be the defined as “the
interest earned on the principal amount for the given time period.”
Simple
interest is calculated on principal regardless of the interest earned during
the course of time. The principle remains constant.Simple Interest is
calculated annually.
Example
of a Question on How to Calculate Interest.
Problem: Manoj takes a loan of 1000 rupees to buy a used
truck at the rate of 10% p.a.
Calculate
the annual interest to be paid for the loan amount at the end of two years.
Solution:
Step 1: P 1000
T  2
R  10% per annum
Step 2: Simple Interest = PTR/100
Step 3: Simple Interest = (1000 x 2 x 10)/100
Step 4: Simple Interest = 20000/100
Step 5: Simple Interest = 200
So, the
total amount that Manoj has to pay at the end of two years.
Step 6:Amount = Principal + Simple Interest
Amount
= 1000 + 200 = 1200
Therefore,
Manoj has to pay Rs 1200 at the end of 2 years.
2.Compound
Interest.
Compound Interest can be defined as the interest
that is calculated on the principal and the interest on principal which is
added every year.
In
compound interest the principal doesn’t remain constant. It varies as the
interest is added to it every year. Compound interest is paid at the end of the
given time period.
Example
of a Question on How to Calculate Interest.
Problem:Find
the compound amount which would be obtained from an interest of Rs.1000 at 10%
compounded yearly for two years.
Solution:
Step 1: P = 1000
T = 2
R = 10%
Step 2: Compound Interest (1) = 10% of 1000
=
100
Step 3:
Compound Interest (2) = 10% of [1000 + 100 ( previous year
interest)]
=
10% of 1100
= 110
Step 4: Compound Interest = Compound Interest (1) + Compound Interest (2)
= 100
+ 110
=
210
Let’s
solve the question using the formula.
Step 1: Compound Interest = P [{(1+ R)/100}ⁿ1]
Step 2: Compound
Interest = 1000[{(1+10/100}²1]
Step 3: Compound Interest = 210
So the
total amount at the end of two years,
Step 4: Amount = Principal +
Compound Interest
Amount = 1000 + 210 = 1210
Therefore,
Manoj has to pay Rs.1210 of total amount at the end of two years.
So, having said that if you
have a credit card and you owe money on it, you will pay less interest if the
credit card company uses simple interest and more money if the company
calculates through Compound Interest.
Learn
from our expert faculty how to calculate interest without using the formula.
Simple
Interest Vs Compound Interest
Criteria
Simple Interest
Compound
Interest
Meaning
Simple
Interest refers to an interest that is calculated as a percentage of a principal amount
Compound
Interest refers to an interest which is calculated as a percentage of
principal and accrued interest.
Principal
Constant
Keeps
changing at regular intervals during the time period
Returns
Less
Comparatively
Higher
Interest
charged on
Principal
Principal
+ Accumulated Interest
Growth
Remains
uniform
Increases
Rapidly
Intensity
Simple
Complex
Formula
PTR/100
P [{(1+ R)/100}ⁿ 1]
Now,
that you know how to calculate interest, it's going to be a cakewalk to solve
questions that appear on how to calculate simple interest and compound
interest. Also you will easily be able to solve questions on how to find the
amount, principal, rate of interest or the time period that was taken to return
the money by just substituting the values in these formulas.
Stay
tuned for more on this! Do let us know if this blog was helpful to you in acquiring all the basic information about Simple and Compound Interest.
In
our next post, we will talk about How to Calculate Interestboth simple and
compound interest in minimum time.
If
calculating interest gives you nightmares, then this post is definitely for you, where we discuss the basics of Simple Interest and Compound Interest along with
some examples.
If calculating interest gives you nightmares, then this post is definitely for you, where we discuss the basics of Simple Interest and Compound Interest along with some examples.
Questions
on how to calculate interest, both simple interest and compound interest,
always find their way in competitive exams such as SBI PO,IBPS, SSC Exam.
Having a thorough understanding about this concept will help you score more and save time.
Let’s
start with discussing the basic idea of Simple Interest and Compound Interest
along with different methods used to solve questions based on them.
What is Interest?
Interest can be defined as the money paid at regular time intervals, at a particular rate for the use of lending cash, or for delaying the repayment of a debt.
It is
the extra amount earned or paid over the money lent or borrowed.
Before
we discuss about how to calculate interest, let us see what are the different
parameters that affect interest.
Elements of Interest.
How to Calculate Interest Using the Formula
There are two ways in which interest is calculated Simple Interest and Compound Interest.
1.Simple Interest.
Simple Interest can be the defined as “the
interest earned on the principal amount for the given time period.”
Simple
interest is calculated on principal regardless of the interest earned during
the course of time. The principle remains constant.Simple Interest is
calculated annually.
Example of a Question on How to Calculate Interest.
Problem: Manoj takes a loan of 1000 rupees to buy a used
truck at the rate of 10% p.a.
Calculate
the annual interest to be paid for the loan amount at the end of two years.
Solution:
Step 1: P 1000
T  2
R  10% per annum
Step 2: Simple Interest = PTR/100
Step 3: Simple Interest = (1000 x 2 x 10)/100
Step 4: Simple Interest = 20000/100
Step 5: Simple Interest = 200
So, the
total amount that Manoj has to pay at the end of two years.
Step 6:Amount = Principal + Simple Interest
Amount = 1000 + 200 = 1200
Amount = 1000 + 200 = 1200
Therefore,
Manoj has to pay Rs 1200 at the end of 2 years.
2.Compound Interest.
Compound Interest can be defined as the interest
that is calculated on the principal and the interest on principal which is
added every year.
In
compound interest the principal doesn’t remain constant. It varies as the
interest is added to it every year. Compound interest is paid at the end of the
given time period.
Example of a Question on How to Calculate Interest.
Problem:Find
the compound amount which would be obtained from an interest of Rs.1000 at 10%
compounded yearly for two years.
Solution:
Step 1: P = 1000
T = 2
R = 10%
Step 2: Compound Interest (1) = 10% of 1000
=
100
Step 3:
Compound Interest (2) = 10% of [1000 + 100 ( previous year
interest)]
=
10% of 1100
= 110
Step 4: Compound Interest = Compound Interest (1) + Compound Interest (2)
= 100
+ 110
=
210
Let’s
solve the question using the formula.
Step 1: Compound Interest = P [{(1+ R)/100}ⁿ1]
Step 2: Compound Interest = 1000[{(1+10/100}²1]
Step 3: Compound Interest = 210
So the
total amount at the end of two years,
Step 4: Amount = Principal +
Compound Interest
Amount = 1000 + 210 = 1210
Therefore, Manoj has to pay Rs.1210 of total amount at the end of two years.
So, having said that if you have a credit card and you owe money on it, you will pay less interest if the credit card company uses simple interest and more money if the company calculates through Compound Interest.
Therefore, Manoj has to pay Rs.1210 of total amount at the end of two years.
So, having said that if you have a credit card and you owe money on it, you will pay less interest if the credit card company uses simple interest and more money if the company calculates through Compound Interest.
Learn
from our expert faculty how to calculate interest without using the formula.
Simple Interest Vs Compound Interest
Criteria

Simple Interest

Compound
Interest

Meaning 
Simple
Interest refers to an interest that is calculated as a percentage of a principal amount

Compound
Interest refers to an interest which is calculated as a percentage of
principal and accrued interest.

Principal 
Constant

Keeps
changing at regular intervals during the time period

Returns 
Less

Comparatively
Higher

Interest charged on 
Principal

Principal
+ Accumulated Interest

Growth 
Remains
uniform

Increases
Rapidly

Intensity 
Simple

Complex

Formula 
PTR/100

Now,
that you know how to calculate interest, it's going to be a cakewalk to solve
questions that appear on how to calculate simple interest and compound
interest. Also you will easily be able to solve questions on how to find the
amount, principal, rate of interest or the time period that was taken to return
the money by just substituting the values in these formulas.
Stay
tuned for more on this! Do let us know if this blog was helpful to you in acquiring all the basic information about Simple and Compound Interest.
In our next post, we will talk about How to Calculate Interestboth simple and compound interest in minimum time.
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