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Simple Interest

Simple interest is a method of percentage increase or decrease. It is called simple because the same percentage of an original value is added on over time.

Interest is when a percentage of an original amount is added on. This is great when your bank gives you interest on your savings, but not so good when you incur interest on a loan - because then you owe more money!

There are two types: SIMPLE and COMPOUND interest.

Simple interest occurs when a percentage of the original amount only is added. That means that the same amount of interest is added each time.

For example:

You invest $\pounds200$ into a savings account which pays 2% simple interest per year. How much will you have in the account at the end of 5 years?

The goal here is to find the amount of interest paid each year, and add it on to the original amount of $\pounds200$

What is simple interest?

Let's have a go!

You invest $\pounds200$ into a savings account which pays you 2% simple interest per year. How much will you have in the account at the end of 5 years?

Convert $2\%$ to a decimal

$\dfrac{2}{100}=0.02$

Find the interest in one year by multiplying the original amount

$2\% \times \pounds200=0.02\times 200=\pounds4$

One year's interest is £4. How much interest do you earn over 5 years?

Over 5 years, we have £20 in interest. Add this on to the original amount.

$\pounds200+\pounds20=\pounds220$

Nice! 🙌

After 5 years, there will be $\pounds220$ in the account!

Imagine that you borrow £500 to buy a TV. You have to pay 4% simple interest per year. If you do not pay back any money for 4 years, how much will you owe?

You invests $\pounds3000$ into a bank account paying $5\%$ simple interest. How much will you have after 3 years?