The two most common methods of calculating interest are compound and simple interest formulas. The most basic is simple interest calculation: A) Simple Interest is the interest computed on the principal ONLY and without compounding. This cost is based on three elements: 1) The principal: the amount borrowed. 2 The rate of interest and 3) The amount of time for which the principal is borrowed. The formula to find the simple interest is as follows: Simple Interest = Principal x Rate of interest x Time (years) Suppose you have persuaded your sibling to lend you $3,000 to purchase electronic equipment that you need for a business start-up. Your sister or brother agreed to lend you the money but will charge you 8% interest and you agreed to repay the loan at the end of 2 years. What is the amount to be paid back to your sibling at the end of the period? B) Add on Interest. This is a method of computing interest in which the interest is calculated on the full amount of the original loan (principal. The add on principal is asses to the original loan amount and becomes a part of the loan amount. Computing the interest is fairly simple Add-On Interest = Principal Times Rate Times Number of Months in the loan/12. Example: Lola borrows $1,000 at 8% add-on interest for 4 years. Total interest is $320 (8% of $1,000 for 4 years). Lola will repay the $1,320 total in equal monthly installment or $110/month. Suppose you borrow $1,000 for 1 year 5% add on interest. What would your total interest and monthly installment be