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Simple Interest

Concept

Simple Interest

When a bank lends money they charge a fee called the simple interest. The interest is based on a ratio of the loan. This percentage indicates the amount of money that should be paid to the bank each year. If the interest rate is 3%3\, \% on a 10001000 dollar loan, it costs 0.031000=30 USD 0.03\cdot 1000=30 \text{ USD} each year until the loan is paid. There is a difference in interest rate and interest cost. The interest rate is the percentage of the loan that should be paid, in this case, 3%.3\,\%. Unlike the interest cost, that is the actual sum that has to be paid in interest each year, for this loan it's 3030 USD.