Simple interest loans are common in everything from a home mortgage to a personal loan. With a simple interest loan, the amount you're borrowing is the **principal**, the length of the loan is the **term**, the money you pay for the privilege of borrowing is the **interest** and the date on which the loan is to be paid in full is its **maturity date**. Although you can use a calculator to determine a simple interest payment, understanding what's behind this calculation is a useful money management skill.

## The Formula

The simple interest formula is **I = PRT:**

- I is the amount of interest expressed as a dollar value
- P is the principal
- R is the annual rate of interest
- T is the loan term expressed in years or a fraction of a year

For example, if you borrow $5,000 at a 5 percent annual interest rate for one year, you'll pay **$5,250** -- **$5,000 x 0.05 x 1** -- on the maturity date.

In the same way, if you borrow $3,000 at a 5 percent annual interest rate for six months, you'll pay **$3,075** -- **$3,000 x 0.05 x 6/12** -- on the maturity date.

**The formula is P/loan term in months.**

## Video of the Day

The monthly payment on a 12-month, $5,000 loan will be **$5,000/12 or $416.67** each month.

The monthly payment on a six-month, $3,000 loan will be **$3,000/6 or $500** each month.

The monthly interest on a $5,000 loan at a 5 percent annual interest rate for one year will be **$5,000 x 0.05 x 1/12 or $20.83**.

The monthly interest on a $3,000 loan at a 5 percent annual interest rate for six months will be **$3,000 x 0.05 x 1/12 or $12.50**.

Add the monthly principal and interest payment to get the monthly loan payment:

- The monthly loan payment on a $5,000 at a 5 percent annual interest rate for one year will be
**$416.67 + 20.83 or $437.50**. - The monthly loan payment on a $3,000 at a 5 percent annual interest rate for six months will be
**$500 + $12.50 or $512.50**.

## Calculate a Short-term Loan Payment

You'll need to convert days into a portion of a year to calculate the payment on a short-term loan with a maturity date measured in days rather than months. These loans are usually paid in a lump sum on the maturity date.

The formula is the **number of days/365 or 366 days** for a leap year:

- A 90-day loan based on 365 days is
**0.25**of one year - A 180-day loan based on 366 days is
**0.49**of one year

The formula is **P x I x T**:

- The interest on a 90-day $3,000 loan at a 5 percent annual interest rate will be
**$3,000 x 0.05 x 0.25, or****$37.50.** - The interest on a 180-day $3,000 loan based on 366 days at a 5 percent annual interest rate will be
**$3,000 x 0.05 x 0.49, or****$73.50.**

Add the principal and interest to get the amount owed as of the maturity date.

- You'll owe
**$3,037.50**--**$3,000 + $37.50**-- on a 90-day $3,000 loan at a 5 percent annual interest rate. - You'll owe
**$3,073.50**--**$3,000 + $73.50**-- on a 180-day $3,000 loan at a 5 percent annual interest rate.