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Interest is the amount of money that is paid for the use of borrowed money.
Let a person '\(A\)' borrows some money from '\(B\)' for a certain period of fixed time at a fixed rate, then '\(A\)' will pay the borrowed money along with the additional money, which is called interest.
 
There are two types of interest:
  1. Simple interest
  2. Compound interest.
In this chapter, we are going to learn about Simple interest (\(I\)). Before that, we should learn some basic terms deals with interest.
  • Principal
  • Amount
  • Time
Principal \((P)\):
The money borrowed or lend out for a certain period is called the "principal" or the "sum".
Amount \((A)\):
  • The sum of the interest and principal is called the amount.
  • \(\text{Amount (A)} =\) \(\text{Principal (P)} +\) \(\text{Interest (I)}\).
Time \((n)\):
The duration of the period for which the money is borrowed is called the time.
Rate Interest per Annum \((r)\):
If interest is payable yearly for every \(100\) rupees, then it is called rate per cent per annum.
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Rate is denoted by \((r)\), and rate percentage is denoted by r100=r%.
 
Interest is generally given in per cent for \(1\) year per annum. Suppose the bank gives an amount of \(₹100\) at an interest rate of \(₹\)6, it is written as 6\(\%\) per year or per annum or in short 6\(\%\) p.a. (per annum).
 
It means on every \(₹100\) borrowed, \(₹\)6 is the required interest to be paid for every one year.
Example:
Vijay takes a loan of \(₹\)50000 at 5\(\%\) per year as the rate of interest. Let us find the amount he has to pay at the end of \(1\) year.
 
Sum borrowed \(= ₹\)50000.
 
Rate of interest \(=\) 5\(\%\) per year.
 
This means if \(₹100\) is borrowed, he has to pay \(₹\)5 as interest. So, for the borrowed amount of \(₹\)50000, the interest for one year would be:
 
5100×50000 \(= ₹\)2500.
 
So, at the end of \(1\) year, Vijay has to give an amount, which is the sum of principal and interest.
 
That is \(A = P + I = ₹\)50000+2500 \(= ₹\)52500.