Simple Interest
The interest earned is calculated as follows:
I=P.r.t
Where:
I=Interest
P=initial principal balance
r=interest rate
t=time
If I borrow $2000 from a friend, that amount of money is the principal. P = $2000.
We agree to have him paid back $3600. This includes the principal and the interest, thus:
I = $3600 - $2000 = $1600
That amount of interest is earned in t=4 years.
From the formula above, we can solve for r as follows:
Substituting:
This means the interest rate is 20%