Grace and Gwen want to go on a cruise but don’t have enough money to do so. They need $2,600.00 so they took out a small personal loan. The interest on the loan is 6.75% and they have to pay the loan back in 3 years. How much interest will they have to pay over the three years and how much will they have to actually pay back to the bank for borrowing the money?

There are two basic forms of interest - simple interest and compound interest.  

For simple interest the formula is:

I = PRT (interest equals principal, interest rate and time)

The principal is the actual amount of money you borrow or put into a savings account.