You borrow $1,000 on a simple interest loan. You pay an annual rate of 3.5%. You will take 3 years to pay back the loan. How much interest will you...

 

Interest refers to the cost borrowing of money. Simple interest refers to the costs of
borrowing money calculated on the original amount borrowed. The formula for simple interest is
as follows: 

`A= P (1 + rt)`

Where: 

A
= Total Accrued Amount (Original amount borrowed + interest)

P = Original
Amount borrowed

r = Interest rate per year  expressed in decimal form (always
convert the interest rate from percentage to decimal form by dividing the interest rate
percentage by 100)

t = time period in months or years. 

From the above information we can write down what is given as follows: 

`P = $1000`

`r = 3.5/100 = 0.035`

`t = 3
years`

`A = ?` We need to find A

Now substitute what's
given in the formula to determine A: 

`A = 1000 (1+ 0.035*3)`

`A = $1105`

 

A gives us the accrued amount, but
we still need to find the interest by using the following formula: 

`I = A -
P`

Where: 

I = Interest amount 

A =
Accrued amount (interest + original amount borrowed)

P = Original amount
borrowed 

Let's find the interest: 

`I = $1105 - $1000 =
$105`

Therefore the interest you will pay is
$105

A shorter way to determine the amount of simple interest
you pay is using the following formula: 

`I = P * r * t`

Where: 

I = interest

P = Original amount
borrowed

r = interest rate expressed in decimal form 

t =
time period in years or months 

Substituting the values from
above: 

`I = 1000 * 0.035* 3 = $105`

Using the simpler
equation yields the same result: Interest you pay = $105