How to Calculate Simple Interest Rate

by Matthew Schieltz, studioD

Many consumer debt products use simple interest rates to calculate your monthly payments. For example, auto loans, mortgages, credit cards and loans from banks may all use simple interest calculations. Some investments, such as bank savings and certificates of deposit accounts, pay you simple interest on the money you invest. Understanding the basics behind simple interest rates can help you figure out how much you'll pay to finance a debt or earn on an investment. It also helps if you wish to charge interest on a personal loan to a friend or family member.

Calculating Amount of Interest

Find the principal amount on which you're paying or earning interest. For a bank or CD account, for example, you earn interest on what you deposited. For an auto loan, the principal equals the amount you obtained from the bank to pay for the car.

Locate the interest rate you're paying or earning and divide it by 100. For example, the bank tells you upfront the interest rate for which you qualify before you sign any agreements. You can of find the interest rate listed on official documentation, such as bank agreements, loan and investment products. Dividing a 12 percent interest rate by 100 equals "0.12."

Figure out the length of time for the investment or loan. Most simple interest rate calculations express time in years or fractions of a year. For example, the time for a one-year or two-year loan or investment equals "1" and "2.5," respectively. A five month loan equals "5/12" and the time for a 15-month loan or investment equals "15/12."

Multiply the principal by the interest rate and the time. To calculate the amount of interest on $5,000 at 3.5 percent interest for 15 months, for example, multiply $5,000 by ".035" by "15/12" to get $218.75.

Calculating the Rate

Find the total amount of interest you paid or earned. For example, suppose you earned $225 on an investment or paid that amount altogether in interest on a loan.

Figure out the time for which the investment or loan occurred and locate the principal that was either loaned or invested. For example, perhaps you invested $2,000 in a 12-month CD account or obtained a six-month personal loan for $3,000 from a bank.

Multiply the principal amount loaned or invested by the time. For example, multiply the $3,000 personal loan in the previous example by "6/12" or one-half to get $1,500.

Divide the total amount of interest you paid or earned by the result. In the previous example, for example, dividing $225 by $1,500 equals "0.15." Multiply by 100 to arrive at the interest rate. For this example, multiplying "0.15" by 100 equals a 15-percent interest rate that you paid for a personal bank loan.

About the Author

Matthew Schieltz has been a freelance web writer since August 2006, and has experience writing a variety of informational articles, how-to guides, website and e-book content for organizations such as Demand Studios. Schieltz holds a Bachelor of Arts in psychology from Wright State University in Dayton, Ohio. He plans to pursue graduate school in clinical psychology.

Photo Credits

  • Liquidlibrary/liquidlibrary/Getty Images