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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.

Payments are applied to accrued interest, past due principal, current due principal, fees (other than late charges), late charges and future due payments in that order. It’s important to note that GM Financial’s standard practice is to apply any extra payments received to future due dates.

Any amount paid over your current amount due will be applied to future payments, which may include principal and interest, assuming the account is current and there are no past-due payments, late charges or other unpaid charges owed on your account. Each payment, regardless of the amount, is applied this way automatically, so you can make your payments as usual, including any extra amount you choose.

We don't currently offer the option to make a principal-only payment (see payment application order above). Therefore, when you pay more than your monthly payment, depending on your payment history, your billing statement may show that your next payment due is for less than the scheduled amount, or it may show that your next payment is not due until a later future date. However, even though your billing statement may reflect that you owe less than the full monthly scheduled payment, you may choose to pay the scheduled payment amount or more than the scheduled amount. Or you may pay the reduced amount shown in the billing statement, depending on what your goals are. If you'd like to pay less interest or pay your account off sooner, you can always pay more than reflected.

If monthly payments are consistently made prior to the scheduled due date or more than the amount due is paid, less interest accrues on the unpaid principal. Therefore, the final payment may be less than the scheduled payment amount listed on your contract and the account may be paid off sooner.

There isn’t a limit to the number of extra payments that can be made in a month. To check your payment, you can chat with us in MyAccount or call us at 1-800-284-2271.

*This does not apply to lease accounts.

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