Simple interest

If you put money into a bank or building society they will pay you interest on this money.

If you have borrowed money from a bank or building society for a mortgage or other loan, you have to pay them interest.

Simple interest is calculated on a yearly basis (annually) and depends on the interest rate. The rate is often given per annum. This means per year.

Example

Sally deposits £600 into an account with an interest rate of 5\% per annum.

Sally depostis a £600 cheque into the bank

Calculate the interest that Sally receives in one year and find how much money she has in the account after one year.

Interest = 5\% of £600

= \frac{5}{{100}} \times 600

= \pounds30

New balance:

= \pounds600 + \pounds30

= \pounds630

After one year Sally will have \pounds630.

Now try this question:

Question

Jamie's bank account pays interest at a rate of 4.3\% per year.

If he puts \pounds850 into his account, how much will Jamie have after a year?

Interest = 4.3\% of \pounds850

= \frac{{4.3}}{{100}} \times 850

= \pounds36.55

New balance:

= \pounds850 + \pounds36.55

= \pounds886.55

The new balance after a year will be \pounds886.55