from a handpicked tutor in LIVE 1-to-1 classes

# Interest Rate Formula

Using the interest rate formula, we get the interest rate, which is the percentage of the principal amount, charged by the lender or bank to the borrower for the use of its assets or money for a specific time period. The rate a bank pays to its depositors for keeping money in a savings account, recurring deposit, or fixed deposit is also termed as the interest rate and in this section, we will discuss the interest rate formula.

## What is Interest Rate Formula?

The interest rate formula helps in calculating the amount of money to be repaid towards a loan taken and the interest over the investment on fixed deposits, mutual funds, etc. The interest rate formula also helps in calculating the interest on credit cards. The interest rate for a given amount on simple interest can be calculated by the following formula,

**Interest Rate = (Simple Interest × 100)/(Principal × Time)**

The interest rate for a given amount on compound interest can be calculated by the following formula,

**Compound Interest Rate = P (1+i) ^{t }**–

**P**

### Interest Rate Formula

The interest rate formula in terms of simple interest is written as:

Interest Rate = (Simple Interest × 100)/(Principal × Time)

The interest rate formula in terms of compound interest is written as:

Compound Interest Rate = P (1+i) ^{t }– P

Where,

- P = principal amount
- i = r = rate of interest
- t = time period

## Examples Using Interest Rate Formula

**Example 1: If Sam lends $5000 to his friend and received $6000 after a year. Using the interest rate formula, find at what interest rate did Sam lends the amount to his friend?**

**Solution: **

Principal amount = $5000(given)

Simple intrest =$6000- $5000= $1000

Time=1 year

Using interest rate formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (1000 × 100)/(5000 × 1)

Interest Rate = 20%

Therefore, Sam will take a 20% interest rate from his friend in a year.

**Example 2: James borrowed $600 from the bank at some rate per annum and that amount becomes double in 2 years. Calculate the rate at which James borrowed the money.**

**Solution:**

Principal amount = $600(given)

Simple interest =$1200- $600= $600

Time = 2 year

Using interest rate formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (600 × 100)/(600 × 2)

Interest Rate = 50%

Therefore, James borrowed the money at 50% rate.

**Example 3: What is the interest rate on principal amount 12000 in 2 years, if the simple interest is 1200?**

**Solution:**

Using simple interest rate formula,

The interest rate of a given amount can be expressed as,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (1200 × 100)/(12000 × 100)

Interest Rate = 5%

Therefore, the interest rate is 5%

## FAQs on Interest Rate Formula

### What is Meant by Interest Rate Formula?

Using the interest rate formula, we get the interest rate, which is the percentage of the principal amount, charged by the lender or bank to the borrower for the use of its assets or money for a specific time period. The interest rate formula is Interest Rate = (Simple Interest × 100)/(Principal × Time).

### What is the Formula to Calculate the Interest Rate Formula?

The interest rate for a given amount on simple interest can be calculated by the following formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

The interest rate formula in terms of compound interest is written as:

Compound Interest Rate = P (1+i) ^{t }– P

Where,

- P = principal amount
- i = r = rate of interest
- t = time period

### What are the Two Main Aspects in the Interest Rate Formula?

The two main aspects to keep in mind while calculating the interest rate formula are simple interest and the principal. Simple interest talks about the amount while a loan is taken and the principal is the exact amount of money taken for a loan.

### Using the Interest Rate Formula, Calculate the Interest Rate on $1500 Borrowed from a Bank which is Doubled in 3 years.

Principal amount = $1500(given)

Simple interest =$3000- $1500= $1500

Time = 3 year

Using interest rate formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (1500 × 100)/(1500 × 2)

Interest Rate = 50%

Therefore, the interested rate on the borrowed money is 50%

visual curriculum