Simple Interest
What is simple interest?
- Interest is extra money added every year (or month) to an original amount of money
- Simple interest is interest that is the same amount each time
- It can be good: for example, putting £100 into a bank account and the bank rewarding you with simple interest of 10% every year
- After one year you’d have £110, after two years you’d have £120, …
- It can be bad: for example, owing £100 to a friend and they charge you simple interest of 10% for every year you don’t pay them back
- After the first year you’d owe them £110, after the second year you’d owe them £120, …
- It can be good: for example, putting £100 into a bank account and the bank rewarding you with simple interest of 10% every year
- If £P is your initial amount of money and simple interest is added to it at a rate of R% per year for T years, then the total amount of interest gained, £I, is given by the formula
- Remember that this formula calculates the amount of simple interest added over T years, not the total amount of money after T years
- To find the total amount of money after T years, add the interest £I to the original amount £P
Examiner Tip
- Exam questions will state “simple interest” clearly in the question, to avoid confusion with compound interest
- Pay attention to how some questions want the final answers (for example, to the nearest hundred)
Worked example
A bank account offers simple interest of 8% per year. I put £250 into this bank account for 6 years. Find
(a) the amount of interest added over 6 years,
(b) the total amount in my bank account after 6 years.
(a) Substitute P = 250, R = 8 and T = 6 into the formula to find the simple interest, I
The amount of interest over 6 years is £120
(b) The total amount after 6 years is the original amount, £250, plus the interest from part (a), £120
250 + 120
The total amount in my bank account after 6 years is £370