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Simple interest is a way to calculate the additional compensation due on the initial principal only. On the whole, the formula is a multiplication of the principal, the rate, and the time. Or simply,

#### Simple Interest (\$) = Principal (\$) x Interest Rate (%) x Time (Years)

Simple Interest (\$): The compensation on the principal in return for the time spent

Principal (\$): The initial amount of money involved in the situation

Interest Rate (%): A fixed percentage charged for the situation

Time (years): The period when the situation occur

#### Example 1

I invested \$100,000 at a rate of 10% for 6 years.

Simple Interest = \$100,000 x 10% x 6 years = \$60,000

Altogether, I will receive \$100,000 + \$60,000 = \$160,000 at the end of 6 years for my investment.

#### Example 2

I invested \$100,000 at a rate of 10% for 6 months.

Simple Interest = \$100,000 x 10% x 6/12 years = \$5,000

All in all, I will receive \$100,000 + \$5,000 = \$105,000 at the end of 6 months for my investment.

In this case, take note that I took 6 months / 12 months for the time period. This is because the formula works only when the unit for the time period is in years.

#### Real Life Application

As an illustration, I bought a secondhand car at \$70,000. After a downpayment of \$30,000, I took a 5 years loan on the remainder at a rate of 2.28% per annum.

Simple Interest = (\$70,000 – \$30,000) x 2.28% x 5 years = \$4,560

In sum, I will pay a total of \$70,000 + \$4,560 = \$74,560 for my secondhand car at the end of 5 years.