Simple Interest

Whenever you borrow money, interest is added to account for the cost of the borrowed money. The interest is added to the amount of the borrowed money to allow the creditor to earn from the lending transaction.

To compute for the simple interest when borrowing money, there are three variables that have to be considered. The first variable in computing simple interest is the principal. The principal is the amount of the money that was borrowed during the transaction.

Another factor in the computation of simple interest is the interest rate, which is given in the percentage form. This is the agreed percentage of the principal that is to be added to the initial amount for an annual period.

The last factor for computing the simple interest of borrowed money is the length of time. Usually, this is expressed in the number of years in which the interest is to be applied to the principal. If the principal is to be paid in less than a year, the length of time is given as a fraction of one year.

Simple interest computations are usually applied when the amount of money borrowed is to be paid within a period of one year. In computing for the simple interest, the principal amount is multiplied with the interest rate and the length of time. For example, $5000 was borrowed for 30 days at a rate of 5%. To compute for the interest, $5000 will be multiplied with 0.05 and 30/365. The 30/365 will account for the fraction of the year that the money was borrowed.