APPLICATION OF SIMPLE INTEREST IN REAL LIFE

If you think applying interest in daily life is difficult, think again. Below are the ways a simple interest can be used in real life.

Car Loans

Since car loans are amortized monthly, part of the loan is allocated to paying the outstanding monthly loan balance. The remainder goes to the interest payment. The interest payable reduces as the outstanding balance lowers, allowing a greater portion of the monthly payment to be placed towards principal payment.

For instance, Mar has a car loan of \$30,000 and the interest is payable at 4%. Using an auto loan calculator, the monthly payment is \$552.50 over 60 months (that’s within a five-year period). Now, in the first month, the interest is \$100. It means the principal repayment is \$452.50. The principal amount , at the end of the first month, is \$29,547.50, and the interest payable is \$100. Assuming the loan is paid on time, the loan amount outstanding will be zero by the end of the 60th month.

Certificates of Deposits

We are talking about certificates of deposits for periods of one year or less. For example, Dan invests \$100,000 in a one-year CD which pays interest at 3% per year. He would earn \$2,000 in interest income after a year. However, if it pays the same interest but only for six months, he will gain \$1,500 in interest income.

Consumer (and Other) Loans

Frequently, malls offer certain appliances on a simple interest basis for periods of up to 12 months (or 24 months in some cases). If you want to purchase a microwave oven, which costs \$3,000 and has an annual rate of 8% in monthly installments, the payment would be \$270 / month. Multiply the amount by 12 months, you would end up paying \$3,240 for buying a microwave oven.

Discounts on Early Payments

Suppliers normally offer a discount to buyers who pay their invoices early. Let’s say establishment XYZ offers a 0.10% discount to entities that settle their payments within a month. If Company ABC has an invoice of \$150,000 and pays it ahead of the scheduled payment, that company will receive a 0.10%, which is equivalent to \$15,000.