Simple Interest

Free sample questions, a clear explanation, and 5 practice skills with an AI tutor that guides without giving the answer away.

Concept Review

Simple Interest: Making Your Money Work for You

Imagine you lend your friend letter: 'G', title: 'Simple Interest', concept: 00 for a year, and they promise to pay you back letter: 'G', title: 'Simple Interest', concept: 10. That extra letter: 'G', title: 'Simple Interest', concept: 0 isn't just a "thank you" — it's simple interest, the reward you earn for letting someone else use your money.

Simple interest is everywhere in the real world. Banks pay you interest when you save money with them. You pay interest when you borrow money for a car or house. Understanding how to calculate it gives you financial superpowers.

The Simple Interest Formula

Simple interest follows one straightforward formula: I = prt

I = Interest earned (the extra money)
p = Principal (the original amount of money)
r = Rate (the percentage per year, written as a decimal)
t = Time (how many years)

Real Example: Sarah's Savings

Sarah deposits $500 in a savings account that pays 4% simple interest per year. How much interest will she earn after 3 years?

Given: p = $500, r = 4% = 0.04, t = 3 years

Formula: I = prt

Calculate: I = $500 × 0.04 × 3

I = $60

Sarah will earn $60 in interest. Her total balance: $500 + $60 = $560

💡 Key Insight

With simple interest, you earn the same amount of interest every year. Sarah earns exactly $20 each year ($60 ÷ 3 years). Simple interest doesn't compound — it stays constant, making it predictable but often less powerful than compound interest over time.

Converting Percentages

Remember to always convert your interest rate percentage to a decimal before plugging it into the formula:

5% becomes 0.05
12% becomes 0.12
0.5% becomes 0.005

Time Matters

If the time period isn't in years, convert it first. Six months = 0.5 years. Eighteen months = 1.5 years. The formula always uses years for the time variable.

🔑 Key Takeaway

That extra letter: 'G', title: 'Simple Interest', concept: 0 your friend pays you isn't random — it's calculated using I = prt. Whether you're earning interest on savings or paying interest on a loan, this simple formula helps you understand exactly where those numbers come from. Financial literacy starts with understanding how money grows over time.

Sample questions

1. Using the simple interest formula I = prt, what does p represent?

○ Interest rate

○ Time in years

✓ Principal (the amount borrowed or invested)

○ The total amount

Answer: Principal (the amount borrowed or invested) — p is the principal, the starting amount of money.

2. Calculate the simple interest on a principal of $500 at an interest rate of 4% per year for 3 years.

○ $20

○ $120

○ $560

✓ $60

Answer: $60 — I = 500 × 0.04 × 3 = 500 × 0.12 = $60.

3. You invest $800 at 5% simple interest for 2 years. How much interest do you earn?

○ $40

✓ $80

○ $160

○ $88

Answer: $80 — I = 800 × 0.05 × 2 = 800 × 0.10 = $80.

Skills in this topic

Calculate simple interest using the formula I = prt
Find the total account balance after earning simple interest
Calculate the principal amount given interest, rate, and time
Calculate the interest rate given principal, interest, and time
Calculate the time period given principal, interest, and rate

Practice 50+ questions on this topic

Unlimited interactive practice, progress tracking, and Nova — your AI tutor. Free to start.

Start learning free →