Interest is the money you pay for borrowing money. The amount of interest you pay on any loan depends on three things:
How much you borrow. (principal)
The interest rate, which is a percent. (rate)
How long you keep the money before paying it back. (time)
I is the interest earned,
P is the principal or the amount of money that you start out with,
r is the annual interest rate as a decimal, and
t is the time in years.
For example: How much will you pay in interest on $2,000 for 3 years at 11.5%?
I = (what we want to know)
P= $2000
r= 11.5%
t=3
1. Change the percent to a decimal. 11.5% =.115
2. Multiply the principal by the rate by the time. I = $2000 x .115 x 3
I= $690
3. The Interest is $690 for three years at 11.5% interest.
How much will you pay in interest on a $5000 loan for 5 years at 5.5%? How much will you pay overall?
click the arrow for the answer---------------->
Change the percent to a decimal. 5.5% = 0.055
Use the formula I=Prt and multiply the principal by the rate by the time. I = $5000 x 0.055 x 5
The interest is $1375 for five years at 5.5% interest.
The total cost of the loan is $1375.00 + $5000.00 = $6375.00
You would like to buy a new laptop. The cost of the laptop is $1500 with all the program software installed. You only have $500. The store offers you a loan for one year for the remainder of the money at a 8.9% interest rate. How much will you pay in interest? How much will you pay overall?
click the arrow for the answer --------------------->
a. How much money will the loan be for? $1500 - $500 = $1000
b. Change the percent to a decimal. 8.9% = 0.089
c. Use the formula I=Prt and multiply the principal by the rate by the time. I = $1000 x 0.089 x 1
d. The interest is $89 for one year at a 8.9% interest rate.
e. The total cost of the laptop is $1500.00 + $89.00 = $1589.00.
Interest that is earned on both the principal and any interest that has been earned previously.
Compound interest formula: A = P(1 + r)t
A represents the amount of money in the account at the end of the time period,
P is the principal,
r is the annual interest rate, and
t is the time in years.
For example: Simon deposits $400 in an account that pays 3% interest compounded annually. What is the balance of Simon’s account at the end of 2 years?
Find the balance at the end of the first year.
I =Prt Use the simple interest formula.
(change 3% to a decimal = 0.03)
I =$400 x 0.03 x 1
I=12
Add the Principal to the interest 400 +12 = 412
The balance at the end of the first year is $412
find the balance at the end of the second year.
I =Prt Use the simple interest formula.
I = 412 x 0.03 x 1
I = 12.36
Add to balance from first year: $412 + $12.36 = $424.36
Calculating compound interest using Compound Interest Formula
A = P(1 + r)t
For example: Jackie deposits $325 in an account that pays 4.1% interest compounded annually. How much money will Jackie have in her account after 3 years?
A = P(1 + r)t
A = 325(1+0.041)^3
A = 325(1.041)^3
A = 325 x 1.128111921
A = 366.64
Jackie will have $366.64 in her account after 3 years.
Julio deposits $345 in an account that earns 3.1% interest compounded annually. How much money is in the account after 4 years? click the arrow to see the answer --------------------->
A = P(1 + r)t
A = 345(1 +0 .031)^4
A = 345 (1.031)^4
A = 345 x 1.12989
A = 389.81
Kim deposits $650 in an account that earns 4% interest compounded annually. How much money is in the account after 2 years?
click the arrow to see the answer --------------------->
A = P(1 + r)t
A = 650(1 + 0.04)^2
A = 650(1.04)^2
A = 650 x 1.0816
A = 703.04