POSTED BY April 22, 2014 11:02 am COMMENTS (8)

ONHi,

I have heard of S.I & C.I calculation while doing FD / loan calculations. Recently I have come across the following logic. Please let me know how it is possible.

A family member of mine has loaned an amount of 1,00,000 to a person who pays Rs 2 for every 100 Rs monthly so that comes about .02 * 1,00,000 = 2000.

That means if I loan 50,00,000 to a person with the same logic I get a monthly amount of 0.02 * 50,00,000 = whopping 1,00,000.

How is this possible ? What kind of Simple Interest calculation is this ?

Thanks for educating me !

Dear Karthik, in the above calculation, the interest should not be divided for 12 months as you are charging interest for a month and this 0.02 is mly rate not yly. Yly rate is obviosuly 24%.

Thanks

Ashal

Dear Karthik, yes it’s SI for 1 month.

Thanks

Ashal

If it’s for 1 month, then SI = 50,00,000 * 0.02 *(1/12) is it not calculated this way ? why is it calculated as SI = 50,00,000 * 0.02 *1 ? Does this mean the other person pays this 1,00,000 interest every month till the principal is returned.

SI – just that – from a calculation perspective.

This is a 24% return in a year (even more considering cash flows happen each month). Now what kind of investment will yield such returns?

1) Real estate? No way. Some lucky buys may yield that return but it is a matter of luck not investment.

2) Equity? Perhaps for a period of 2-3 years but again you must be lucky to get in and get out at the ideal points! Since it is difficult to time is why we recommend to stay invested.

3) Debt – Forget more than 10%+ returns

For someone to pay that interest they have to generate more return than 24%. And the principal stays like that – which is where the safety of principal is at risk.

There is no security here. Just that a person is giving loan to another.

Dear Karthik, if not simple interest, what should be the interest here? Just recall the simple interest formula you read in class 6-7-8.

SI = Principal amount * Rate of Interest * Time /100

Thanks

Ashal

Ashal, my question is what sort of interest is this ? Is this SI ? payable monthly. I do remember SI from my class 6, but this is weird. What do you say is this SI ?

if it’s SI as per the formula I see that interest annually is just 1,00,000 for 50,00,000 payable at end of the year. Here a person is getting 1,00,000 for month. Is this possible? That’s my question.