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Business Math: How to Calculate Interest

To calculate interest correctly, you need to know three values:

  1. The principle amount
  2. The interest rate
  3. The amount of time (in years or fractions of a year)

When you know these three values, calculating interest is simple.

We’ll call interest (I), principle (P), rate (r), and time (t). Then I = Prt.

Example: On June 1st, an employee borrows $350 from his employer who charges 6% interest as long as it is paid back by the first of the year. How much will the employee owe on January 1st?

Answer: The principle is $350, or P=350. The interest rate is 6%, or r=.06. We need to figure out what t equals since it is not in the form of years. To do this, we need to find out what our fraction of a year is. And to do that, we need to know the number of days of the loan. Let’s just add them up. June = 30, July = 31, August = 31, Sept = 30, Oct = 31, Nov = 30, Dec = 31. So the total days will be 214 and the fraction of the year is (214)/(365).

Our formula, then, looks like this: I = (350)(.06)(214/365) = $12.31

Your turn!

If you have a problem you’d like me to help you solve, please leave a comment!

Do you need to try more caluclations, other than calculating interest? Check out our free math calculators!


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10 Comments

  1. Marlin Collins
    Marlin Collins December 8, 2017

    Bought car for $14,000. Paid $301.78. It’s at 19 percent. For 72 months. How do I figure principle?

    • Peggy Emch
      Peggy Emch December 12, 2017

      You’d have to check your amortization schedule. Your principle paid will be lower in the beginning of your loan and get higher as you get closer to paying it off.

      • zaib
        zaib February 16, 2019

        The owner of a retailing organization is interested in the relationship between price at which the commodity is offered for sale and the quantity sold. The following samples have been collected:
        Price 25 45 30 50 35 40 65 75 70 60
        Quantity Sold 118 108 112 100 111 108 95 88 91 96

        anyone can solve ?

  2. michelle
    michelle November 25, 2018

    Find the principal amounting to 16856.10 in 2 years at .108 simple interest rate.

  3. Hanz
    Hanz September 7, 2019

    You are planning to invest 5000 in a bank with rate of 6% simple interest. How much time you need to invest to make it 9000?

  4. Debtor Finance
    Debtor Finance April 19, 2020

    This is a very helpful article. This will surely help me to do my accounting especially when calculating interest. Thanks for sharing this article.

  5. FactorLoads
    FactorLoads June 3, 2020

    Thanks for sharing this article. I need to learn how to calculate interest. This article is a good guide for me. I’ll definitely return to this site.

    • Lindsay Sommers
      Lindsay Sommers June 4, 2020

      Thank you! We’re glad you found it helpful.

  6. NBF
    NBF July 20, 2020

    Thanks for sharing this article. This is a big help for me to avoid issues in calculating interest. This article is very easy to follow. This is a very useful post. I’ll definitely return to this site.

    • Lindsay Sommers
      Lindsay Sommers July 21, 2020

      Thank you! We’re glad you found it helpful.

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