A. INTEREST ON SAVINGS
Interest is a charge paid to use someone’s money. It is the amount the bank pays you to use your money. It is also the amount you pay to borrow money.
When you deposit money in the bank you get back more money than you put in. The extra money you have got back is called the ‘interest’. The interest is calculated at certain per cent per year.
The money deposit or borrowed is called the principal (P). The interest is calculated per year at a certain percentage of the principal. This is called the rate of interest (R).
When Rohan gets 5% interest on his savings, it means that for every 100 rupees he puts into his account, he will get back Rs. 5 extra at the end of the year.
For Rs. 100 he gets Rs. 5
For Rs. 200 he gets Rs. 10
For Rs. 300 he gets Rs. 15
For Rs. 400 he gets Rs. 20
For Rs. 500 he gets Rs. 25
To find out how much interest Rohan will get for Rs. 500 we can use the formula:
Interest = Principal × Rate
Rate = 5% = 5/100
500 × 5/100
500 × 5/100 = 25
At the end of one year Rohan will earn Rs. 25 from the bank as interest. He will get back Rs. 525 (Rs. 500 + Rs. 25) from the bank. This is called the amount.
So, we can say that Principal + Interest = Amount and Amount – Principal = Interest
B. INTEREST ON BORROWINGS
When you take a loan, you are using the bank’s money and have to return more than you borrowed. The extra amount that you pay back to the bank is called the ‘interest’. Interest is calculated at a certain per cent for a year.
To work out the interest that Mr Rao will pay for his loan, we can use the same formula and multiply it by the number of years of the loan which is called ‘time’ (T).
(a) Principal = Rs. 20,000 Rate of interest = 10% Time = 4 years
Simple Interest = Principal × Rate × Time/100 = P × R × T/100
20000 × 10 × 4/100 = 8000
Mr Rao will need to pay Rs. 8000 as interest. At the end of 4 years he will pay back an amount of Rs.28,000 (Rs. 20000 + Rs. 8000) to the bank.
When the interest is calculated for a given time period only on the principal, the interest is called simple interest.
CHECKPOINT: The interest paid depends on the amount lent or borrowed (principal), the per cent of interest charged (rate) and the length of time the money is borrowed (time).