A simple interest loan offers many benefits compared to loans that compound frequently. a simple interest loan charges interest on a daily basis on the principal balance. when you make a payment towards a simple loan, a part of it goes toward interest and the rest goes toward paying the principal. at the initial stage, a larger portion of your monthly payment goes toward interest, but as your loan matures, the interest portion decreases slowly. car loans, education loans, mortgage loans, and appliances loans are some of the common examples of simple interest loans.
there are many benefits of a simple interest loan. a few examples of simple interest loan benefits are provided below for your reference:
1. easy to calculate
the simple interest loan calculation is very easy as you only need to multiply the principal amount of money borrowed by the interest rate and the tenure of the loan. all the calculations of simple interest are based on the principal amount. the rate of interest in simple interest is in the format of r/100 where r represents the rate of interest at which the loan is offered. n represents the term of the loan in the 'year' format, so if the loan tenure is of 3 years, write 3 in place of n to calculate the simple interest. in case the time period is in months, divide the result by 12 (the number of months in a year).
simple interest = p (principal amount) x r (rate of interest) x n (loan tenure)
2. pay less interest
simple interest is best for you if you are taking a loan as it keeps the overall interest amount lower compared to the amount you would be paying with compound interest. when you make a simple interest loan payment, a portion of the installment goes towards repayment of interest, and the rest is used to pay off the principal amount. as the outstanding loan balance reduces every month, the interest payable also decreases, which means a greater part of the monthly payment goes toward the principal repayment.
3. no interest on interest
since simple interest is calculated on the basis of the principal amount and not on the interest, the borrower saves a lot of money on interest payments. in the case of a compound interest loan, the interest is calculated on the principal amount as well as on the accumulated interest. hence, you end up paying interest on interest. if you are planning to take a loan, you should keep on looking for a lender that offers simple interest loans, instead of compound interest loans.
4. beneficial for borrowers
simple interest loans are highly beneficial for borrowers as they have to make lower interest payments compared to compound interest loan offers. in a simple loan, the interest is calculated based on your outstanding loan balance on your payment due date. hence, if you pay off the loan early or make more payments toward your principal, you can lower the interest amount.
5. save interest by paying off early
with a simple interest loan, you have an option to reduce the total interest paid by making more than your minimum monthly payment toward your principal amount or you can choose to pay off the loan early considering there is no foreclosure penalty on your loan.
planning to get a simple loan?
if you are planning to get a simple loan, CRED simple loan calculator will help you estimate the interest you have to pay on the principal amount. CRED simple loan calculator is a free online tool that gives instant and error-free results. the step-by-step guide for using the CRED simple loan calculator is provided below to help you in your interest calculations:
you can rearrange all three components - loan amount, interest rate, and tenure - to get an estimate of interest payment. note that in simple interest, the interest amount does not change over time.
use CRED simple loan calculator now