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 \(\pounds886.55\)