APRIL 12, 2023
What is a Daily Simple Interest Loan
Learn about simple interest and how it could affect your loan.
When it comes to taking out a loan, it’s commonly understood you’ll need to pay it back with interest. That’s why the total amount you pay back is higher than the original loan figure.
For example, let’s say your loan amount is $25,000.
On a 72-month, $19,737.71 loan at 9% interest with no extra fees, you might be asked to make monthly payments of $415.17. If all your payments are paid in full and on time, using the daily simple interest method, you’d pay back a total of $4,760.90.
$19,737.71 Loan
9% interest/72-month term
Interest over 72 months: $4,760.90
Monthly Payment: $415.17
Total Paid: $24,498.61
A daily simple interest loan means that interest is accruing every day. However, since that interest is only calculated on the current unpaid principal, “we” (the lender) split your payment amount between the interest owed and a portion of the principal balance. Every time you make a monthly payment by the due date, the interest charges will be lower with your next payment because the principal balance will be lower.
So how is Daily Simple Interest calculated?
Everyone knows that paying on time is important, but did you know the timing of your payment affects how that balance decreases?
Everyone knows that paying on time is important, but did you know the timing of your payment affects how that balance decreases?
days = $4.8668
After 31 days, your loan will accrue
$150.87 of interest.
$4.8668 x 31 = $150.87
When that first monthly payment of $415.17 comes due, $150.87 of it goes toward the interest, and the remaining $264.30 will be applied to the $19,737.71 principal balance.
New principal balance: $19,473.41
This is one of the primary advantages of a daily simple interest loan – when you make payments on time, the amount you owe goes down, and therefore the amount of interest you’re charged the next month will be lower.
So, if the following month also has 31 days, the daily interest will be based on the new balance.
($19,473.41 x 9% interest) /365 = $4.80 daily interest $4.80 x 30 days = $144.00 monthly interest. Another payment of $415.17 would make the new principal balance: $19,202.24.
What if I make an additional or one-time large payment on top of my monthly payment?
Let’s say you are able to pay an extra $1,500 on top of your monthly payment.
Returning to our example, if you paid the first payment of $415.17 but then paid an extra $1,500; that would bring the principal balance down to $17,973.41. (Remember, $264.30 of that first payment already went to the principal.)
$19,737.71 – ($264.30 + $1,500) = $17,973.41
This extra payment effectively cuts your remaining principal in half, which means you are now accruing less daily simple interest.
The fact that you only accrue interest on your current principal balance is one of the main advantages of a daily simple interest loan; this only works in your favor if you pay your loan payments in full and on time each month.
What about late payments?
With daily simple interest loans, late payments also mean you pay more interest. Even if your late payment was accepted within a grace period and no late fees were incurred, every day that you’re late means another day of daily simple interest will accrue.
Let’s say the payment for the first month of your $19,737.71 loan was due on the 2nd of February, but you paid it on the 17th of February – 15 days late. The interest charge for those 15 days plus the first 31 days you owed in interest would be $224.02.
Because your payment arrived late, instead of reducing your principal balance by $264.20 in the first month, you would only reduce it by $224.02 due to more of the payment being applied to extra interest. So, your principal balance is now at $19,546.56 instead of $19,473.51.
It may not sound like a lot of money now, but if you’re late or miss payments on a regular basis, you’ll accrue more interest. As a result, it will take you longer to pay off the loan.
When you make late payments, the following may happen:
- Your standard payment may not be enough to satisfy the interest that is due.
- Unpaid interest will continue to add up.
- There could be less principal reduction.
- You may be charged late fees.
Here are the things worth remembering about daily simple interest:
- Interest accrues daily.
- You’re charged interest on your unpaid principal balance.
- When you make a payment on time, you pay the interest accrued in the previous month first, with the remaining payment amount going toward the principal.
- By paying more than your scheduled payment or paying early, you can potentially reduce the amount of payments you have to make and lower the amount of interest you pay.
- If you miss a payment or pay late, you’ll end up paying more interest.
- You may be charged late fees if you pay late or miss a payment.
- Even if a late payment is accepted within a grace period and you are not charged a late fee, every day you’re late means another day for daily simple interest to accrue