It is important to know not only the interest rate of your loan but also how to calculate this rate. The interest can either be compound or simple.
When it comes to simple interest loans, the interest is based on the principal alone. It is easy to calculate the interest with the use of the interest rate, the term of the loan, and the principal.
Simple interest loans include mortgages, personal and auto loans, and several student loans. Being familiar with simple interest loans will help you get a good understanding of their true cost.
How Simple Interest Loans Work?
Running the numbers is made easy using a simple interest loan calculator. However, if you wish to go DIY with the calculation, all you have to do is multiply the principal amount buy the rate of interest by the duration of the loan to know the interest.
If the term of your loan is less than a year, the formula you will use for calculating simple interest is a bit different.
To calculate the interest amount charged in a period of 30 days, a daily interest rate is going to be computed through dividing the yearly interest rate by 365. The principal outstanding is going to be calculated per day then multiplied by daily interest rate to determine the daily interest charge.
The daily interest will then be multiplied by 30 to determine the overall interest charged for the period of 30 days.
Benefits of Simple Interest Loans?
Simple interest loans are considered as the most cost-effective choice for borrowers. The advantages are important because you will be paying only the interest on your owed principal at any period of time. You could apply a particular principal payment with no need to pay anything to the accrued interest throughout the life of your loan that effectively reduces the interest you owe right away.
A simple interest loan also offers borrowers ease of use. These loans are usually easier for the customers to understand. It is also easier for them to do their calculations on their own to confirm that interest was properly charged or how much they need to pay under various scenarios.
These simple interest loans come with flat payment every month so there is also predictability with the payoff. Provided that you make on-time monthly payments, you can pay off your loan based on the schedule.
The primary challenge with these simple interest loans is finding and being approved for one. Having a strong and solid relationship with the personal banker can help you in getting a simple interest loan. You can also lessen your risk profile if you have an outstanding credit score that can make you an even better candidate for the loan.
If you have plans to inquire about a loan at your bank, you have to be upfront when it comes to your needs and wants.
Never be afraid to ask for simple interest loans and state that this is your preferred way to borrow money.
When the bank says no or it doesn’t offer such loans, you might want to research other available options. You can check if there are online lenders or credit unions offering such loans. When you find a lender, check the qualification requirements to determine your chances of being approved.