With this formula he determines that the CD will pay him $150 at the end of its term, bringing his money to $1,650. To determine how much heвЂ™ll make, Jose multiplies $1,500 by 5% by two years, or $1,500 x. ItвЂ™s kind of like youвЂ™re lending money to the bank. вЂњCDвЂќ stands for вЂњcertificate of depositвЂќ and itвЂ™s a financial product that pays interest in exchange for you agreeing to deposit money for a certain number of years. It offers a 5-percent APR вЂњAnnual Percentage RateвЂќ (simple interest) for a 24-month CD. Jose has $1,500 to invest and thereвЂ™s a certificate of deposit at his bank that has caught his eye. Some savings accounts offer some form of compound interest, however, which could offer Ayesha a better return. 02 x 1) tells her that at the end of the year sheвЂ™ll have $380 in interest, bringing her account to $19,380. To calculate how much sheвЂ™ll earn, she multiplies $19,000 by 2% by one. Crunching the numbers, Bianca finds that sheвЂ™ll pay $7,000 in interest over the life of the loan.ДЄyesha has $19,000 in savings and decides to deposit it in a savings account that offers a simple interest rate of 2 percent per year. To determine how much sheвЂ™ll pay in interest, Bianca will need to use the simple interest formula: I = Prt. The loan she gets has an annual interest rate (assessed using simple interest) of 7% and a term of five years. She has enough for a downpayment but needs to borrow $20,000 to make the purchase. Examples of Simple InterestД«ianca just graduated from college and is ready to buy her first car.

Most loans and interest-bearing accounts will feature one or the other - it depends on the terms of the agreement. The other type of interest youвЂ™re likely to come across is compound interest. You might encounter it when taking out a personal loan, car loan, or setting up a bank account. Simple interest can be found in many places in the personal finance world. Since youвЂ™re only paying interest on the initial lump sum, itвЂ™s fairly easy to calculate. Thus, to calculate the total interest, you multiply the principal by the interest rate by the time period that interest is accrued. N = number of periods that the loan lasts.вЂќ I = interest rate (one is charged per period).

вЂњI explained simple interest to my students as being neat as a PIN,вЂќ Wasserman says. We spoke to Jim Wasserman, a retired economics and media literacy teacher, to learn how simple interest works in our everyday lives.

Many loans rely on simple interest in their calculations, but youвЂ™ll want to be certain before signing anything. No matter how often the interest charge is applied, it will only be applied to the initial amount. What is simple interest? Not to be confused with compound interest, simple interest is interest that is applied only to the original amount of money borrowed or deposited, also known as the principal amount.

If you have questions about simple interest, we have answers. Understanding how interest is calculated will help you make more informed decisions when taking out a loan, using credit, and investing. The other method, simple interest, applies interest only to the initial amount of money borrowed or deposited. One method of assessing interest is called compound interest, and it consists of periodically applying a percentage rate of interest cost to an initial sum of money as well as the accumulated interest. However, interest can also be paid to you-common ways to earn interest include savings accounts and certificates of deposit. ItвЂ™s the percentage you pay to your lender when you carry a balance on your credit card or take out a loan. Interest, in the most basic terms, is the cost of borrowing money.

Loan principal definition