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:
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
), 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.