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what type of loans use simple interest calculation formula?

what type of loans use simple interest calculation formula?

July 8, 2022
5 min read
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what type of loans use simple interest calculation formula?
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simple interest loan refers to the type of loan where the interest component is calculated by multiplying the principal with the rate of interest at which the loan is offered and the tenure of the loan. the simple interest formula looks like: simple interest = p (principal) x r (rate) x t (loan tenure).

when you borrow a loan, you need to pay back to the lender the amount borrowed, called the principal, plus the interest. interest is the amount that a lender charges for loaning the money. the interest is expressed as a percentage of the borrowed amount, called the rate of interest. simple interest is the most simplified way of computing interest on a loan. 

simple interest loan does not take into account compounding. this type of loan is significantly beneficial to borrowers who can afford to pay off their debts earlier than the scheduled payment dates. making early payments or part payments will reduce the loan’s principal balance and therefore, the overall cost of interest paid over the tenure of the loan will also reduce. however, make sure you never miss the installment payments as more money will be directed toward the interest and less toward the principal.

mostly a simple interest loan charges interest on a daily basis instead of monthly. when you make a payment towards your simple loan, the interest portion is paid first, and then the rest of the amount is used to pay the principal amount. 

simple interest loans

many banks and lenders charge simple interest on a variety of loan products, including car loans, education loans, mortgage loans, and other short-term loans. 

car loans

if you take the example of car loans, you would find that the interest is calculated on the principal loan balance on a daily basis. when you make the payments towards your car loan, the amount is first applied to pay off any interest due, and then the rest of the amount is used towards the principal balance payment. like many loans, simple interest loan repayments are made in equal, monthly installments. at the beginning of the loan, more of your monthly payment goes towards the interest and rest on the principal. as the loan term matures, more of your payment goes to pay the principal, and less goes towards interest pay off.

education loans

education loan or student loan is another example of simple interest loans where the interest is charged on a daily basis. in this type of loan, the interest is calculated only on the balance principle and not on the previously accrued interest.

mortgage loans

mortgage loans also use simple interest method to calculate the interest. however, there may be some terms and conditions to this type of loan. before signing the loan agreement document, read carefully how the interest accrues on the mortgage - daily or monthly. if the lender charges interest daily, it is a simple interest loan; however, if it accrues monthly, you have to check if it's a negative amortization loan. a negative amortization loan is the one in which if you fail to pay the installment at the due date, the unpaid interest is added to the balance of the unpaid principal.

retail loans

some of the retail stores also offer simple interest loans to buyers to make their products more affordable. these are short-term loans and need to be paid off in equal monthly installments. it helps buyers increase their purchasing power and stores to increase their sales. 

in conclusion

simple interest loans calculate interest on the principal balance only, so it is always beneficial for you as you won't have to pay interest on interest as you would with a compound interest loan. also, by making early payments or additional payments you can reduce the loan’s principal balance and cut the total cost of interest paid over the life of the loan. to make your simple interest loan calculation easier and faster, you can use the CRED simple loan calculator. it's a free online calculator that can help you estimate the overall interest payment on your simple loan. you just have to input details such as - principal amount, interest rate, and tenure of the loan to get accurate and error-free results using the CRED simple loan calculator.

use CRED simple loan calculator