1. What is the Simple Interest Formula?

The simple interest formula calculates the interest payment for a loan based on the principal balance and the interest rate. It's commonly used for short-term loans or simple interest accounts.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( I \) — Monthly interest payment (currency unit)
• \( P \) — Principal balance (currency unit)
• \( R \) — Monthly interest rate (annual rate / 12, as a decimal)

Explanation: The formula calculates the interest due for one month by multiplying the principal balance by the monthly interest rate.

3. Importance of Interest Calculation

Details: Understanding monthly interest payments helps borrowers budget for loan repayments and compare different loan options.

4. Using the Calculator

Tips: Enter the principal balance in dollars and the annual interest rate as a percentage. The calculator will convert the annual rate to a monthly rate and compute the interest.

5. Frequently Asked Questions (FAQ)

Q1: Is this the same as compound interest?
A: No, simple interest calculates interest only on the principal, while compound interest calculates interest on both principal and accumulated interest.

Q2: What's the difference between annual and monthly rate?
A: The annual rate is divided by 12 to get the monthly rate. A 12% annual rate becomes 1% monthly (12%/12).

Q3: When is simple interest typically used?
A: Simple interest is common for short-term loans, car loans, and some personal loans.

Q4: Does this include the principal repayment?
A: No, this calculates only the interest portion. The total payment would be principal + interest.

Q5: How accurate is this for long-term loans?
A: Simple interest is less accurate for long-term loans where the principal balance changes over time.