Aug 06 2025 9:25 AM
Simple interest loans, simplified
Stay ahead of the game
What are simple interest loans – and what does it mean for you in your financial journey?
Let's break it down: a simple interest loan just charges interest based on the principal amount. No compounding interest - just straightforward terms. They are often used for auto, personal, student, and even mortgage loans.
Where does your money go?
Great question!
- Generally, when you make a payment, a portion goes toward interest (based on your remaining principal).
- The rest goes toward reducing your principal balance.
At the beginning of your loan, more of your payment goes toward interest. But as your balance shrinks, generally so does the interest you owe. That means more of your payment goes toward the actual loan — not just the interest.* It's a gradual shift that works in your favor over time.
How your interest is actually calculated
Interest grows daily - and the number of days between each payment can shape the amount owed.
The formula is simple:
Daily interest = (Principal x Interest)/365 (number of days in a year)
Let’s say you have a $20,000 loan with a 15% interest rate:
(20,000 x 0.15)/365 = $8.22/day.
So, you're paying $8.22 in interest each day until your first payment. The upside? As your principal goes down, so does your daily interest
Make time work for you with early payments
Our favorite simple interest perk? No prepayment penalties. That means you could pay it off early and save money.*
Timing plays a big role:
- On-time payments = less interest over time
- Early payments = even more savings (interest accrues daily!)
- Extra payments = faster payoff and lower total cost
*But heads up – late payments may cost you. Delays mean more of your next payment goes to interest instead of reducing your balance.
Here's a win: paying on time consistently may also give your credit score a healthy boost!
