Unless there is a specific reason to prorate interest based on date, the exact date of the payment is basically not part of the calculation of the interest.Īn early payment is not applied until the next due date.Ī traditional loan usually has a grace period for late payments. In traditional loans and mortgages, interest is calculated on a monthly basis regardless of when the payments are received. Frequently Asked Questions How do other types of loans handle early, late, extra, missed or partial payments? In other words, the monthly payment and total interest for a simple interest loan can be estimated fairly closely using the compound interest formula.įor the sake of keeping things simple and avoiding a complex debate, note that the term "simple interest" is used to describe features #1 and #2, but not #3.
It can be shown that the amortization of the simple interest loan is what makes the monthly payment and total interest nearly the same as a traditional loan (when monthly payments are applied on the same dates as the traditional loan). While that might seem harsh, the borrower needs to remember that this situation has occurred because they have made insufficient payments to cover the interest due.
That is because the unpaid interest balance is paid before the principal. If a borrower has been having a hard time making payments, it is possible that their next few payments might not reduce the principal. 2) Unpaid Interest is Not Added to the PrincipalĪ simple interest loan is an amortized loan, meaning that you make periodic payments and unpaid interest is paid before your payment is applied to the principal. See the simple interest article and calculator to learn more about the simple interest formula. Assuming that the prior unpaid interest balance was zero, that means that $15 of the $100 payment would be interest and $85 would be principal, making the new principal balance $9915 as of. Let's say the borrower paid $100 on (15 days later). If the annual rate was 3.65%, then the daily rate would be 3.65%/365 = 0.01%. The interest due is calculated as rate* days* principal, where rate is the daily rate, days is the number of days since the last payment, and principal is the amount owed.Įxample: Let's say the last payment was made on and after applying the payment, the principal balance is $10,000. How do you calculate the interest for a Simple Interest Loan? First, the annual rate is converted to a daily rate by dividing the annual rate by 365 (or 360 in some day count conventions). By using the Legal Information, you release Vertex42 from all claims, losses or damages arising out of such use, and you agree that Vertex42's liability, if any, shall be limited as set forth in the Terms of Use. Vertex42 makes no representation or warranty whatsoever (including any warranty of merchantability or fitness for a particular purpose) regarding the Legal Information, and your use of the Legal Information is solely at your own risk. The simple interest loan agreement template, instructions and related information ("Legal Information") provided herein may not be appropriate for your specific situation, may not be suitable for use in some jurisdictions, and should be reviewed, and modified if necessary, by a licensed attorney prior to being used as a legal contract. IMPORTANT DISCLAIMER: is not a law firm and does not provide legal advice or legal representation. The template does not include provisions for describing collateral, so this agreement would mainly be used for personal unsecured loans. It includes provisions for describing frequency of payments, how interest is accrued, and how fees are charged. I worked with a real estate attorney to create a loan agreement template in Word specifically for this Simple Interest Loan calculator.
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