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What is simple interest?
Calculate your monthly repayments and total loan cost with this type of rate.
If you have a personal loan, chances are you’re paying simple interest. It’s one of the least-expensive types of interest out there, but calculating it can get a little complicated. To save time, use a calculator instead.
What's in this guide?
- What is simple interest?
- What's the simple interest formula?
- How to calculate a monthly interest payment in 3 steps
- Simple interest calculator
- Find a simple-interest loan
- What types of loans come with simple interest?
- How does simple interest compare to other types of interest?
- Bottom line
- Frequently asked questions
What is simple interest?
Simple interest is the most common way to calculate interest — usually applied to a loan or bank account. Lenders calculate it daily based on your loan balance between repayments. That calculation doesn’t include interest added up during the previous days, making it the least-expensive type of interest.
For example, if you had a loan balance of $10,000, you only pay daily interest on that $10,000 until your next repayment. Other types of interest rates might add the daily interest rate to the loan balance, so you’re effectively paying interest on interest.
What’s the simple interest formula?
For loans, simple interest follows this formula:
- Principal (loan balance) x Annual interest rate x Number of days between repayments
How to calculate a monthly interest payment in 3 steps
Follow these steps to calculate the amount you’d pay in interest for one month with simple interest:
Step 1: Find the daily interest rate.
You can find the daily interest rate by dividing your annual interest rate by 365. Here’s how you’d find the daily interest on a loan with a 7% rate:
- 0.07 / 365 = 0.0001918
Step 2: Multiply the daily rate by your current balance.
This step gives you the interest cost per day on your current balance. Say you have a $10,000 balance. Here’s how it works:
- 0.0001918 x $10,000 = $1.918
Your daily interest cost would be about $1.92.
Step 3: Multiply the daily interest cost by the days between your repayments.
If your repayment period started in a 31-day month, multiply it by 31. Otherwise, multiply it by 30 — or 28 if it’s February. Here’s how it works if the previous example was for a loan repayment between August and September:
$1.918 x 31 = $59.458
The total interest cost would be $59.46 for that month. The next month would come with a different interest payment based on the number of days in the month.
Simple interest calculator
Skip the number crunching by using our calculator. It’ll tell you your total monthly repayments and how much you’ll pay in interest over the life of your loan.
Find a simple-interest loan
What types of loans come with simple interest?
Almost all personal loans, car loans, student loans and long-term business loans come with simple interest. It’s the most common type of interest rate out there.
However, lenders that specialize in bad-credit loans might use a different type of interest rate.
How does simple interest compare to other types of interest?
Although it’s the most common, it’s possible to find loans that use other types of interest rates. These include:
- Compound interest. With this rate, lenders add any unpaid interest to your balance between loan repayments. This means you’ll pay interest on interest.
- Add-on interest. Here, a lender precalculates your interest and adds it to your loan balance before you start making repayments. It’s closer to a flat fee, meaning paying off your loan early won’t save you any money.
Both compound and add-on interest are more common with loans for borrowers with bad or no credit.
Example: Simple vs. add-on interest
Let’s a look at how simple interest compares to add-on interest rates:
|Simple interest||Add-on interest|
|Term||3 years||3 years|
|Total interest cost||$1,115.76||$2,100|
As this chart shows, while simple interest is only slightly cheaper per month, it costs nearly $1,000 less than the loan with add-on interest.
A simple-interest loan is the least expensive type of personal loan. And luckily, it’s the type of interest rate most lenders charge — especially if you have good or excellent credit. But if you have bad credit or otherwise struggle to qualify, check with your lender to make sure it offers this rate type.
To read more about how borrowing works, check out our guide to personal loans and start comparing your options.
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