Some Helpful Tools
This section will cover the fundamentals and rules of finding the interest of a principal.
To find the interest to be paid on a loan or received from an investment, use the formula shown below.
interest = principal x rate x time
The interest rate is usually calculated yearly or annually. However, sometimes the rate is calculated over a period of months.
In this case, use a fraction to show that the period of time is less than one year.
Example 2:
Find the interest Gloria will earn from an investment of $700 at 4.5% for 2 years.
Hint: Change 4.5% to a decimal. Then, multiply this rate times .01.
Gloria will earn an additional $63 in 2 years from her investment.
The principal invested is $5,350.
Interest Rate Formula
Principal is the original amount of a loan or investment.
Interest is created based on the amount of the principal.
Rate is shown as a decimal based on the percent.
Time represents the length of time of the loan.
Solving Interest Problems
Below are examples for finding the interest earned on a loan or investment.
Example 1:
Matt borrowed $20,000 from the bank to start a sporting goods store. The interest rate on the loan is 5% for 3 years. What is the interest earned?
The interest earned is $3,000.
This means that Matt not only owes the bank $20,000, but he owes an additional $3,000 in interest.
Therefore, in 3 years time, Matt will have to pay $23,000 on a loan that was originally $20,000 because of interest.
- Plug in the information you have already.
- Change the percent to a decimal.
- Multiply.
interest = principal x rate x time
interest = $20,000 x .05% x 3
interest = $3,000
interest = principal x rate x time
interest = $700 x .045 x 2
interest = $63
Suppose you know what the interest paid on a year is, but you would like to find the interest rate.
Set up a percent proportion.
Example 1:
The yearly interest paid on a $2,500 loan is $175. What is the interest rate? By plugging the information into the formula, you can solve this problem.
Percent Proportions
Example 2:
Let's say you know the interest rate and the interest earned, but you want to find the principal. Begin by setting up a percent proportion to find the answer.
Find the principal investment if 12% interest earned on the investment is $642.
N stands for the missing number.
The annual interest rate is 7%.
In order to learn about an interest rate, it is important to learn about a principal.
The interest rate and principal work together when applying for a loan or when making an investment.
Math: Interest Problems - Tutorial
