Learning how simple interest loans work may not be top on your to-do list, but knowing the basics might just save you money down the road. Time to cast aside those doubts with a crash course on simple interest.
What is simple interest?
Simple interest is a method for calculating the daily interest on an unpaid principal balance. When you finance with GM Financial, your finance agreement is a simple interest contract, meaning that you aren't charged interest on interest (which is a good thing), just daily interest on the unpaid principal balance.
Early payments
Whenever you make a payment with GM Financial, any accrued interest is paid first. So, if you make a payment early, less interest will have accrued and more of your payment will go toward the principal. Paying early can whittle down your principal over time, and you may pay significantly less in interest over the life of your finance contract.
On-time payments
Are you a stickler for paying your bills on time? Good financial habits like this mayhelp your credit score. If you make all your payments on time, you'll complete your contract on the estimated date.
Late payments
Life happens,and it’s easy to forget about a bill now and then. If you make a late payment, you may be facing late fees. Plus, your late payment will need to pay down more interest before it can be applied to the principal balance. Making late payments can increase the amount you owe at the end of your contract because smaller amounts of the principal are paid over time. You canput your account on cruise controlby signing up for automatic payments and avoid late payments altogether.
Paying extra
If you pay more than your monthly payment, there should be more going toward the principal after paying the daily interest. This means the principal balance reduces faster, and the final payment might be less than listed in the contract.
Now you know how your payments affect your simple interest contract.Log in to MyAccountordownload our mobile appto update your preferences and worry less about missing payments. If you still have questions about simple interest, visit oursimple interest page.
By Kelly Schaefer Hill, GM Financial
Soccer mom, corgi enthusiast, virtual learning teacher’s assistant, Kelly Schaefer Hill wears a lot of hats, but one thing she can’t stay away from is data and fun facts. When she’s not writing a post to answer your questions, she’s hanging with her family.
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FAQs
Simple interest is calculated by looking at the principal amount borrowed, the rate of interest, and the time period it will cover. Simple interest is more advantageous for borrowers than compound interest, as it keeps overall interest payments lower.
What is important in finding simple interest? ›
Simple interest is calculated by looking at the principal amount borrowed, the rate of interest, and the time period it will cover. Simple interest is more advantageous for borrowers than compound interest, as it keeps overall interest payments lower.
What is the simple interest of a loan? ›
What is simple interest? Simple interest is calculated only on the initial principal amount. It remains constant throughout the investment or loan term. The formula is I = P * r * t, where I is the interest, P is the principal amount, r is the annual interest rate, and t is the time in years.
What is a real life situation of simple interest? ›
Some everyday life examples of simple interest are automobile loans, loans on instalments, etc. The total amount of simple interest is demonstrated on the certificates of deposit provided by the banks or organisations.
What are the disadvantages of simple interest? ›
Disadvantage: Limited flexibility - Simple interest can be less flexible than other types of interest, such as compound interest. This is because the interest charges are fixed for the duration of the loan, rather than being adjusted based on changes in the market or the borrower's financial situation.
What are the pros and cons of simple interest? ›
In summary, borrowing with simple interest has several advantages, including transparency, early repayment without penalty, lower interest rates, and predictable payments. However, borrowers should also be aware of the disadvantages, such as potentially higher interest rates than other types of loans.
What are the three elements of simple interest? ›
The formula to calculate simple interest is made up of multiplying three factors: principal amount, rate, and time. The principal is the original amount of the loan, the rate is how fast the loan grows, and the time is how long the loan is borrowed.
What are the benefits of simple interest loans? ›
5 benefits of simple interest loans
- 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. ...
- pay less interest. ...
- no interest on interest. ...
- beneficial for borrowers. ...
- save interest by paying off early.
Compound interest is better for you if you're saving money in a bank account or being repaid for a loan. If you're borrowing money, you'll pay less over time with simple interest.
Are simple interest loans common? ›
Simple interest – which is far more common - calculates the interest based on the outstanding balance of the loan either on a daily or monthly basis. Precomputed interest is an uncommon way of calculating interest payments for your auto loan.
Typically, simple interest benefits borrowers. By only charging interest on the principal amount, simple interest charges less interest overall than a loan that uses compounding interest. That means that borrowing money is cheaper. If you're getting a loan, getting a loan with simple interest may help you save money.
What is simple interest problems? ›
Simple Interest (SI) calculates the amount of interest for a certain principal amount of money at some interest rate and for a given period of time. The formula of simple interest is given by: SI = PTR/100. Here, P = Principal amount.
Where does simple interest use? ›
It is a common method of managing interest where interest is either paid or paid out as it is generated, rather than compounding. Simple interest methods are often used for short-term loans such as personal loans and car loans, and unsecured loans are the most common type of simple interest loan.
What is the rule for simple interest? ›
Simple interest is calculated by using the formula, principal x rate x time ÷ 100. The rate of interest is always in terms of a percentage, so it is taken to be r/100.
How does simple interest work? ›
In the case of a loan, simple interest is only charged on the original principal amount. Simple interest is calculated by multiplying the loan principal by the interest rate and then by the term of a loan. Compound interest multiplies savings or debt at an accelerated rate.
What is better than simple interest? ›
When it comes to investing, compound interest is better since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when you're calculating the annual percentage yield. That's the annual rate of return or the annual cost of borrowing money.
Why is it important to know simple and compound interest? ›
When it comes to investing, compound interest is better since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when you're calculating the annual percentage yield. That's the annual rate of return or the annual cost of borrowing money.
What is the solution to find simple interest? ›
For calculating simple interest, Simple Interest = (P x T x R)/ 100 = (5000 x 2 x 5)/ 100 = 500 Rs.
What is the principal in simple interest? ›
Principal: The principal is the original amount borrowed for a loan or the original amount invested. Interest rate: The interest rate is the proportion of the principal that is added to the principal at each time period. This time period must be the same unit of time as the time period used to calculate t.
How do you find simple interest in math? ›
Explanation: The simple interest formula is given by I = PRt where I = interest, P = principal, R = rate, and t = time. Here, I = 10,000 * 0.09 * 5 = $4,500. The total repayment amount is the interest plus the principal, so $4,500 + $10,000 = $14,500 total repayment.
