![]() ![]() ![]() The interest (usually a percentage), can be simple or compounded. The cost of borrowing money is referred to as interest, and the lender charges a fee to the borrower for giving the loan. ![]() In contrast, if you pay the loan late, you will pay more interest than if you pay on time. If you pay on time every month, your main balance reduces faster and you pay off the loan sooner than expected. ![]() Who Can Benefit from Simple Interest Loans?Īs simple interest is usually calculated daily, consumers who pay their loans early or on time every month will benefit the most. If you made the same payment on May 20, $258.91 would be applied to principal. This is a $20 reduction.Įxample: In the above situation, if you sent a $300 payment on June 1, $238.36 would be applied to principal. Nevertheless, if you pay on May 21, the lender will only charge you interest for 20 days in May, reducing your interest payment to $41.09. In this instance, the interest for 30 days is $61.64. Say your first payment is due on June 1 and you pay it on time, the financing firm calculates your interest for the month of May. An ExampleĬonsider an automotive loan with a principal balance of $15,000 as well as a simple internet rate of 5% per annum. If you don’t have access to an interest rate calculator you can also use an Excel spreadsheet to assist you with your calculations. If you prefer, you can always use our simple interest calculator to ensure your numbers are correct. You can use the formula below to calculate simple interest:Ĭalculate simple interest (I) by multiplying the principal (p) by the rate (r) by the number of time periods (t).Īs you can see, calculating simple interest is, well… simple. While you could use an interest calculator, the math involved is not complex. Tip: When it comes to mastering your finances, it’s important to understand simple interest. Unlike compound interest where the amount of interest is calculated based on principal and earned interest, the amount of simple interest you pay or earn is calculated based on the original principal amount. Likewise, if you deposit money into a savings account, you will earn money on the initial deposit, which is also interest. When you borrow money, you must repay not only the amount you borrowed – the principal – but also an extra percentage of the principal, known as interest. How Simple Interest WorksĪ basic simple interest definition is the money paid on a loan or money earned on a deposit. Once you understand how interest works, you can make better-informed financial decisions.
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