Personal Loans and Simple Interest
“To Buy or NOT to Buy”, that is the
Often consumers want to buy clothing, appliances, cars, boats,
and/or houses, but they do not have the cash to purchase the
So, the consumer is faced with a challenge:
“Should I borrow the money and pay the interest or
can I WAIT until I can pay cash?”
If the consumer decides the item cannot wait, he/she faces
applying for credit and paying interest.
• The amount of credit and the interest that a
consumer may obtain depends on the assurance
that he/she can give the lender that he/she will
be able to repay the loan.
l d d
• Secur ty co atera
s anyt ng o va ue p e ge
by the borrower that the lender may sell or keep
if the borrower does not repay the loan.
• A personal noteis a document that states the
terms and conditions of the loan
Interest can be beneficial and costly!!
While you may not yet understand terms such
interest rate and compounded monthly
ONE thing seems clear, money in certain savings
accounts grow rapidly and paying off credit
cards can be VERY challenging!
Define types of Interest
• Interest is the dollar amount that a person is
either paid for lending money to the bank
(SAVINGS acct) OR the amount of money the
that must be paid to use the lender’s money.
• Simple interestis based on the entire amount
of the loan for the total period of the loan.
Calculating Simple Interest
Interest = principal rate time
Where time is expressed in YEARS and
rate is expressed in DECIMAL form.
Calculating Simple Interest for a Year
You deposit $2000 in a savings account at
Hometown Bank, which has a rate of 6%. Find
the interest at the end of the first year.
p = the amount deposited, or principal
p = $2000.
r = rate = 6% = 0.06.
t = one year
The interest is:
I = Prt = ($2000)(0.06)(1) = $120.
At the end of the first year, the interest is $120.
You can withdraw the $120 in