Simple Interest
Consider a person borrows $15,000 from the bank to purchase a car. If they are obligated to pay the creditor $700 for each year the loan is in existence, what is the simple interest rate?
Expand Hint
Simple interest is interest based on the loan’s principal portion or the original contribution to a savings account.
Hint 2
Simple interest does not compound, so a borrower won’t pay interest on accrued interest, or an account holder will only gain interest on the contribution.
Simple interest is interest based on the loan’s principal portion or the original contribution to a savings account. Simple interest does not compound, so a borrower won’t pay interest on accrued interest, or an account holder will only gain interest on the contribution. The general formula is:
$$$A=P(1+rt)$$$
where
$$A$$
is the uniform amount per interest period,
$$P$$
is the initial principal balance,
$$r$$
is the simple interest rate, and
$$t$$
is the time. However, the $700 mentioned in the problem statement is only the interest owed, not including any additional payments needed to bring down the $15k principal balance. Thus, the problem is asking us to find what percentage of $15k is equal to $700:
$$$\frac{\$700}{\$15,000}=0.0467\rightarrow 0.0467\times 100=4.67\%$$$
4.67%
Time Analysis
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