(Bob takes out a loan of $500 at 8% simple interest He will pay off the loan in one year. Calculate the amount of interest Bob will pay)

Question

I was confused on how to solve this problem

Answer 1

The loan amount is $500 and the interest rate is 8% per year. The interest rate is simple it means its not compound interest. 

Simple interest are easy to calculate and the % rate of interest is applied only on the principal loan amount. 

However, compound interest means applying the % rate of interest on the loan amount plus any interest from previous periods.

Principal amount of loan is the loan taken originally. Here principal is $500.

Rate of interest is given in % so we divide it by 100 before multiplying. Here rate is 8% or 8/100 = 0.08

The period is only one year and interest is simple so we calculate the interest as follows: 

Interest (I) = Principal(P) * % rate of interest (R)

I = P*R

I = 500 * 0.08

I = 40