Word Problems: Simple Interest

In order to solve simple interest problems, you should be able to:

There are several types of interest problems. This lesson will deal with solving simple interest problems. There are four variables in a simple interest equation and you will be given information about three of those variables. By knowing values for three of the variables, you can then solve for the fourth variable. The formula for simple interest problems is:

I is the amount of interest the account earns.
P is the principle or the amount of money that is originally put into an account.
r is the interest rate and must ALWAYS be in a decimal form rather than a percent.
t is the amount of time the money is in the account earning interest.

Suppose a bank is offering its customers 3% interest on savings accounts. If a customer deposits $1500 in the account, how much interest does the customer earn in 5 years?

In this problem, we are given the interest rate (r), the amount put into the account (P), and the amount of time (t). However, before we can put these values into our formula, we must change the 3% to a decimal and make it 0.03. Now we are ready to go to the formula.

So after 5 years, the account has earned $225 in interest.

If we want to find out the total amount in the account, we would need to add the interest to the original amount. In this case, there would be $1725 in the account. Keep in mind that our formula is only for the amount of interest. The formula can also be solved for other variables as in the examples below.

Let's Practice

Question #1
Jamie wants to earn $500 in interest so she’ll have enough to buy a used car. She puts $2000 into an account that earns interest. How long will she need to leave her money in the account to earn $500 in interest?

Question #2
A local bank is advertising that you can double your money in eight years if you invest with them. Suppose you have $1000 to invest. What interest rate is the bank offering?

Try These


Question #1
		Kelly plans to put her graduation money into an account and leave it there for 4 years while she goes to college. She receives $750 in graduation money that she puts it into an account that earns 4.25% interest. How much will be in Kelly’s account at the end of four years?
	A. $127.50
	B. $754.0425
	C. $877.50
	D. $1275

Question #2
Randy wants to move his savings account to a new bank that pays a better interest rate of 3.5% so that he can earn $100 in interest faster than at his old bank. If he moves $800 to the new bank, how long will it take for him to earn the $100 in interest?
A. 3.57 years
B. 0.357 years
C. 0.28 years