Interest Rate Formula 

Using the interest rate formula, we get the interest rate, which is the percentage of the principal amount, charged by the lender or bank to the borrower for the use of its assets or money for a specific time period. The rate a bank pays to its depositors for keeping money in a savings account, recurring deposit, or fixed deposit is also termed as the interest rate and in this section, we will discuss the interest rate formula.

What is Interest Rate Formula? 

The interest rate formula helps in calculating the amount of money to be repaid towards a loan taken and the interest over the investment on fixed deposits, mutual funds, etc. The interest rate formula also helps in calculating the interest on credit cards. The interest rate for a given amount on simple interest can be calculated by the following formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

The interest rate for a given amount on compound interest can be calculated by the following formula, 

Compound Interest Rate = P (1+i) ^t – P

Interest Rate Formula

The interest rate formula in terms of simple interest is written as:

Interest Rate = (Simple Interest × 100)/(Principal × Time)

The interest rate formula in terms of compound interest is written as:

Compound Interest Rate = P (1+i) ^t – P

Where, 

• P = principal amount
• i = r = rate of interest
• t = time period

Examples Using Interest Rate Formula 

Example 1: If Sam lends $5000 to his friend and received $6000 after a year. Using the interest rate formula, find at what interest rate did Sam lends the amount to his friend?

Solution: 

Principal amount = $5000(given)

Simple intrest =$6000- $5000= $1000

Time=1 year

Using interest rate formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (1000 × 100)/(5000 × 1)

Interest Rate = 20%

Therefore, Sam will take a 20% interest rate from his friend in a year.

Example 2: James borrowed $600 from the bank at some rate per annum and that amount becomes double in 2 years. Calculate the rate at which James borrowed the money.

Solution:

Principal amount = $600(given)

Simple interest =$1200- $600= $600

Time = 2 year

Using interest rate formula,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (600 × 100)/(600 × 2) 

Interest Rate = 50%

Therefore, James borrowed the money at 50% rate.

Example 3: What is the interest rate on principal amount 12000 in 2 years, if the simple interest is 1200?

Solution:

Using simple interest rate formula,

The interest rate of a given amount can be expressed as,

Interest Rate = (Simple Interest × 100)/(Principal × Time)

Interest Rate = (1200 × 100)/(12000 × 100)

Interest Rate = 5%

Therefore, the interest rate is 5%