Understanding Simple Interest
What exactly does "simple interest" mean? It's a common question with a simple answer.
Simple interest is an accrual method. Interest accrues on a daily basis on the unpaid principal balance on the account. Each payment you make will first pay down any accrued interest, then the rest will apply to the principal or other applicable fees. You can calculate simple interest by multiplying the daily interest rate by the principal by the number of days that elapse between payments.
Watch our short video for an illustration on how simple interest works. Still have questions? See our most frequently asked questions below.
Frequently Asked Questions
Simple interest is a method for calculating interest accrual. Interest accrues daily on the unpaid principal balance, and the interest charge is always based on the principal. Interest on interest is not charged. To learn more about simple interest and its impact on your contract, download our simple interest fact sheet.
Per diem translates to “per day”. It refers to the amount of interest that accrues daily based on the outstanding principal balance at that time and the interest rate on the contract. At the beginning of the contract, your “per diem” is higher because your principal balance is higher. As your principal decreases over the life of your contract, your per diem will also go down.
To calculate interest per diem or daily interest, divide your annual interest by the number of days in a year.
Depending on whether you make your payments on time, late or early, the final installment amount owed at your maturity date can vary. Download our simple interest fact sheet to learn more about how payments are applied.
If monthly payments are made every month on the due date as detailed on the contract, the final payment due at maturity will likely be the same as what is listed as the final payment on the contract.
If payments are consistently made after the scheduled due date, more interest can accrue and the principal balance can reduce more slowly. When the monthly installment is paid, the principal balance reduces slower; therefore, the final payment can be more than the scheduled payment amount that is listed on your contract. Learn more by downloading our late payment fact sheet.
If monthly payments are consistently made prior to the scheduled due date, less interest accrues on the unpaid principal. When the monthly installment is paid, the principal balance reduces faster; therefore, the final payment may be less than the scheduled payment amount that is listed on your contract.