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Guide to Daily Simple Interest Loans and How They Work

What Are Daily Simple Interest Loans?
Susan Guillory
Susan GuilloryUpdated April 28, 2023
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If you’re looking at personal loans, mortgages, or car financing, you’ll want to know two key things — the interest rate and how the interest will be calculated.Interest is either simple or compound. With a simple interest loan, the interest is based only on the principal (amount of the loan). With a compound interest loan, you pay interest on the principal plus any interest that has accrued. Because you don’t pay any interest on the interest, a daily simple interest loan can end up costing less, provided you make your payments on time.Here’s what you need to know about how daily simple interest and how daily simple interest loans work.

Daily Simple Interest (DSI) Defined

How does a simple interest loan work? A simple interest rate is called “simple” because it is based on a simple calculation: the principal times the percentage of interest per year times the number of years of the loan.Here's the formula:Simple Interest = Interest Rate x Principal Balance x Time PeriodNow, what is daily interest? A daily simple interest loan, or DSI loan, rate is based on the same concept, except it takes the annual interest rate and divides it by 365 (days in a year) to come up with a daily interest rate. For each day after your bill is sent, you accrue interest using the daily simple interest formula. 

How Daily Simple Interest Works

With a daily simple interest loan, your interest is calculated by multiplying the daily interest rate by the principal balance (how much you have left to pay on your loan) and then by the number of days since your last payment (typically 30 if you pay monthly).The formula looks like this:Daily Simple Interest = Daily Interest Rate x Principal Balance x Time Period Recommended: Interest Rate During a Recession: Does It Increase?

Simple Interest vs. Compound Interest 

With simple interest, the amount of the principal and the rate of interest don't change over the life of the loan. That means the principal balance used to calculate the interest due doesn't increase based on interest charges.Compound interest, however, is more complicated. With compound interest, the interest that has accumulated on the principal in every period is added to the principal amount. As a result, you end up paying interest on the accumulated interest. You can calculate compound interest, though the formula is fairly complex compared with the one for simple interest. However, there are online compound interest calculators that can make this easy to do. Since you’re not paying interest on the interest, a simple interest loan typically costs less, depending on how much you borrow, the loan term, the interest rate, and any fees.Here’s a side-by-side comparison of simple interest vs. compound interest:
Simple InterestCompound Interest
How It WorksPrincipal and interest rate don’t change over the life of the loan.Interest that accumulates on the principal in every period is added to the principal.
Interest PaidBorrower pays the same interest for the term of the loan.Borrower pays interest on top of interest.
FormulaPrincipal x Interest Rate x Time Period = Amount of InterestPrincipal (1 + Interest Rate/100)Time Period – Principal = Amount of Interest

How Daily Simple Interest Loans Work

Simple interest loans are paid back in equal, monthly installments that are determined when you receive the loan. That's why you may have coupon books or electronic reminders of your monthly payment for the life of your loan.When you make your monthly payment on a DSI loan, like a $5,000 loan, the payment first goes toward the interest you owe for the past month, and the rest goes toward paying down your principal balance. The interest for the month is paid in full, so it does not continue to accumulate.If you pay your bill on time, the lender calculates your interest on the 30 days of the month prior. If you pay your bill early, you’ll pay less in interest than if you wait until just before the due date. If you pay your bill late, on the other hand, you’ll pay more in interest (since more days have accumulated), and you may also incur a late fee.When you’re considering loans, it’s a good idea to look not only at the interest rate but also at the APR. When it comes to APR vs. interest on personal loans, the APR includes loan fees, which means it fully illustrates the cost of borrowing money.

How to Calculate Daily Simple Interest

Here’s the method for calculating daily simple interest on a loan

Daily Simple Interest Formula

Remember, for a daily simple interest loan, you multiply the daily interest rate by the principal balance and then by the number of days since your last payment to get the daily simple interest rate. The formula looks like this:Daily Simple Interest = Daily Interest Rate x Principal Balance x Time Period

Daily Simple Interest Example

Let’s say you were to borrow $12,000 at an annual interest rate of 6% and will repay it in three years. You’ll pay $2,160 ($12,000 x 6% x 3) in interest over the life of the loan. Your monthly payments (principal plus interest) will be $393. Next, in order to use the DSI formula above, we need to calculate the daily interest rate. To do that, we take the 6% interest and divide it by 365 days to get .000164. Now we plug that into our daily interest rate formula, which looks like this:12,000 x .000164 x 30 That means $59 is owed in interest the first month. So out of your $393 payment, $59 will go toward interest and $334 will go toward principal. Over time, however, less of your monthly payment will go toward interest (as your balance goes down, the “P” in the above equation will be a little smaller each month), and more of your payment will go toward principal.This is assuming you always make your payments on the due date. For example, If your payment is due on October 1 and you pay it precisely on the due date, the finance company calculates your interest on the 30 days in September. However, if you make the payment earlier, say September 20th, the finance company charges you interest for only 20 days in September, which means less of your payment would go toward interest and more toward principal. This is one way to manage personal loans. If you pay later than October 1, on the other hand, then you’ll pay more in interest and less of your $393 payment will go toward your principal. In addition, you may incur a late fee. Recommended: Guide to Personal Loan Interest Deductions

Pros and Cons of Daily Simple Interest Loans

Just like personal loans have pros and cons, so do simple interest loans. Here are the benefits and drawbacks.
Easy to calculateCan be hard to find
Typically costs less than a compound interest loanLate payments lead to added interest charges

Pros of Daily Simple Interest Loans

If math isn’t your forté, you might get cross-eyed trying to calculate what you’d pay with a compound interest loan, but simple interest loans are easy to figure out.And, if you make your payments on time, you will typically end up paying less interest with a simple interest loan than you would with a compound interest loan. If you’re able to make your payments early and/or make extra payments, you can save even more.Recommended: Are Personal Loan Interest Rates Fixed or Variable?

Cons of Daily Simple Interest Loans

Not every lender offers simple interest loans, so finding one can sometimes be a challenge.Another downside is that If you're late with a payment, you will accrue more interest. Even if you’re just one day behind schedule, a greater portion of your payment will go toward interest. This can affect your loan schedule, potentially adding more time to pay off your loan and making the loan cost more than you anticipated. 

3 Types of Daily Simple Interest Loans

Below are some of the loans that may offer daily simple interest.

1. Auto Loans

A simple interest loan is one of the most common types of financing for an auto loan. Because the interest rate is based on the outstanding balance, borrowers can typically save on interest by paying more than the monthly car payment.A car loan is usually a secured loan, meaning the vehicle is collateral on the debt. If you don’t make payments, the lender can seize the vehicle.

2. Personal Loans

A personal loan is a type of loan that typically allows for flexible use, has short- to moderate-term repayment options, and offers relatively quick funding. There are many types of personal loans that use simple interest. You can explore personal loan options from different lenders to find one that works best for you. 

3. Mortgage Loans

Mortgages are typically considered simple interest loans because they are not compounded (meaning you likely won’t pay interest on the interest). However, very often the interest on a mortgage is calculated on a monthly basis, rather than on a daily basis, though there are some DSI mortgages available.

Personal Loan Rates

Daily simple interest loans are ones where interest accrues daily on the unpaid principal balance. As the principal balance is reduced, the interest charges go down because less interest accrues on a smaller principal balance. While it may not sound exactly “simple” at first, the key thing to understand with these types of loans is this: If you make your loan payments on time, you can avoid paying any additional interest charges and will pay your loan off as scheduled. And, if you pay early, you may be able to reduce the total cost of your loan.If you’re ready to start shopping for a personal or other type of loan, Lantern by SoFi can help — our online tool makes it easy to compare offers from multiple lenders in just a few minutes.

Frequently Asked Questions

How is daily interest calculated in a simple interest loan?
How does a daily interest loan work?
How is daily interest paid?
Photo credit: iStock/baona

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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