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Understanding Simple Interest

What exactly does "simple interest" mean? It's a common question with a simple answer.

In short, simple interest accrues on a daily basis and is based on the remaining unpaid principal on the contract. Each payment you make will first pay down any accrued interest, then the rest will apply to the principal or other applicable fees.

Click the video for an illustration on how simple interest works or see our most frequently asked questions below.

Frequently Asked Questions

Simple interest is a method for calculating interest accrual. Interest accrues on a daily basis on the unpaid principal balance and the interest charge is always based on the principal balance. Interest on interest is not charged.

Depending on whether you make your payments on time, late or early, the final installment amount owed at your maturity date can vary.

If monthly payments are made every month on the due date as detailed on the contract, the final payment due at maturity should most 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 at a lower rate. When the monthly installment is paid, the principal balance reduces at a slower rate, therefore the final payment can be more than the scheduled payment amount that is listed on your contract.

If monthly payments are consistently made prior to the scheduled due date, less interest accrues on the unpaid principal balance. When the monthly installment is paid, the principal balance reduces at a faster rate, therefore the final payment may be less than the scheduled payment amount that is listed on your contract.

Per diem means "per day" and is 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 decrease.

To calculate interest per diem or daily interest, take your annual interest and divide it by the number of days in a year.

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