Find The Interest Paid On A $1,200 Loan For Three Years

Find the interest paid on a loan of $1,200 for three years at a simple interest rate of 5% per year

Calculate the simple interest and total amount paid after three years for a loan of $1,200 at an annual interest rate of 5%. Use the simple interest formula: SI = Principal × Rate × Time. Then, find the maturity value by adding the interest to the principal.

Sample Paper For Above instruction

Introduction

Interest calculations are fundamental in finance, providing insights into the cost or return on investments and loans. The simple interest method offers a straightforward way to compute interest over a period, assuming a constant rate and linear accrual. This paper demonstrates how to calculate interest paid and total repayment amounts for a specific loan scenario using simple interest formulas.

Calculating Interest and Total Payment

Given are the principal amount, rate, and duration: $1,200, 5% per year, and three years, respectively. To compute the interest, use the formula:

SI = Principal × Rate × Time

Where:

  • Principal (P) = $1,200
  • Rate (R) = 5% or 0.05 per year
  • Time (T) = 3 years

Calculating SI:

SI = 1200 × 0.05 × 3 = 1200 × 0.15 = $180

The total amount paid after three years, also called maturity value, is the sum of principal and interest:

Maturity Value = Principal + SI = $1,200 + $180 = $1,380

Discussion

This calculation demonstrates that a borrower must pay $180 in interest over three years for a $1,200 loan at 5% interest rate annually. The total repayment amount would be $1,380. Such straightforward calculations are essential for both lenders and borrowers to understand the costs associated with loans and to plan finances accordingly.

Conclusion

Using the simple interest formula, financial professionals and individuals can effectively estimate interest payments and total amounts due. Precise application of these formulas ensures clarity and aids in financial decision-making.

References

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