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.

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 $$\pounds886.55$$