Find the simple interest owed if $760 is borrowed at 2.8% for 10 years.
The correct answer and explanation is:
To find the simple interest, we use the Simple Interest Formula: Simple Interest (SI)=P×R×T\text{Simple Interest (SI)} = P \times R \times T
Where:
- PP = Principal (initial amount borrowed) = $760
- RR = Annual interest rate (in decimal form) = 2.8% = 0.028
- TT = Time (in years) = 10
SI=760×0.028×10=212.80SI = 760 \times 0.028 \times 10 = 212.80
✅ Correct Answer: $212.80
📚 Explanation (300 words):
Simple interest is a method used to calculate the interest charged or earned on a principal amount of money over a specific period, without compounding. This means the interest is always calculated based on the original amount, not on any accumulated interest.
In this scenario, a person borrows $760 at a fixed annual interest rate of 2.8% for 10 years. The simple interest formula is straightforward and effective when the interest rate stays the same and there is no compounding of interest.
Let’s break it down:
- First, convert the percentage rate to a decimal. Divide 2.8 by 100 to get 0.028.
- Then multiply the principal amount by this rate and then by the time period:
760×0.028×10=212.80760 \times 0.028 \times 10 = 212.80
So, over the course of 10 years, the total interest owed on the loan will be $212.80.
This means the borrower will pay $212.80 in addition to the original $760 when repaying the loan. The total repayment would be: 760+212.80=972.80760 + 212.80 = 972.80
Simple interest is most often used in scenarios like car loans, short-term personal loans, and some savings accounts. It’s helpful because it provides a clear, predictable amount of interest over time, making it easy for borrowers and lenders to plan payments.
Understanding how to compute simple interest helps individuals make better financial decisions, especially when comparing different loan or investment options.