As anybody who has taken out a loan or activated a credit card will tell you, the devil isn't in the details – it's in the interest rate. Interest is money paid at a particular rate for the use of money lent, or for delaying the repayment of a debt. In other words, the money you pay on the money you borrow. Any kind of money lending comes with interest rates attached, which makes being able to calculate interest a tangibly valuable skill. So today, we're going to learn how to calculate simple interest.

Not all lenders use the same formula to calculate interest. As a matter of fact, most lenders have their own formula. There is, however, what's called "simple interest," which is what we're looking at today. The formula for simple interest is I=prt; I stands for interest, p stands for principle – or amount borrowed, r stands for rate – or percent changed to a decimal, and t stands for time in years.

The best way to learn is to do, so let's take a run at an example problem. Say that Annie borrows $15,000 for 48 months at an 8% rate: what is the cost of the loan? Using I=prt to solve, we plug in our given information and go to work.

We plug in 15,000 for our principle, 8% for our rate, and 48 months – or four years – for our time:

I = 15,000 \( \cdot \) 0.08 \( \cdot \) 4

15,000 times 0.08 equals $1,200, which, when multiplied times four years, equals $4,800.

This gives us our cost: the cost of the loan will be $4,800.

If we wanted to calculate the overall cost of Annie's purchase, with the interest included, we'd want to add the cost of the item to the amount of interest on the item for the sum total.

$15,000 + $4,800 = $19,800

Fifteen thousand dollars plus forty-eight hundred dollars equals nineteen thousand eight hundred dollars. Annie's overall cost for her purchase will come out to be $19,800.