Regional Talk > Southern California > Simple Interest loan help.

Simple Interest loan help.

Ummmm... I don't think it works that way.

You may be confusing this with an "amortizing" loan (like a home loan in which the monthly payments are applied first toward reducing the interest balance, and any remaining sum towards the principal balance.)

If your theory were accurate, everybody would have zero interest loans as they would pay 29 days in advance each month, and the lender would never make any profit.

The main advantage of a simple interest loan is that you should be able to pay it (the entire loan balance) off early, if you can, without incurring the balance of the interest as well.

Simple interest loans accrue interest daily, as opposed to fixed interest loans, where there is no benefit to paying before the due date.

So if my daily interest is say, $7.60, and I pay the monthly payment 10 days early, that's $76 that they cannot add as interest to the loan.

At least that's how I understood it when the loan dude told me (my last loan, not this current one, but same bank and same type [simple interest]).

Yes - I think you're right that if someone had a payment due date of the 30th, but they paid every month on the 1st, they'd essentially have an interest free loan. I think maybe it's that people just don't realize they can do this.

- FM
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This just in from the department of redundancy department...

reply to FutureMon

reply to FutureMon

Agreed. I thought if you paid EXTRA and not early, it was on principal.

You are correct, the extra will go straight to the principle. But FM has a point too...
if on an simple intrest loan (and I would read your loan documentation on the calculation of the interest, paying early, would shave the money off...
so on his loan, if it is 7.5 a day and he pays 10 days early, that would equal an extra 75 dollars to the loan... but if he stays paying 10 days before the due date, it is a one time deal, after that, he is charged for 30 days interest.
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I have a restraining order against the voices in my head.

If it were a "done deal" after the first early payment, that would be the same as saying my payment due date was moved up. They can't continue to charge me daily interest in the month that the payment has already been made.

The interest accrues starting on each due date, for up to 30 days (until the next due date). You might say it 'resets' on the due date.

If I pay 10 days early, I shaved off those extra daily interest amounts.

Next month, same deal. Each time I pay 10 days early, I'm shaving those 10 days of interest off the loan.

I guess I'll find out when I get my next statement showing my early payment and the new balance.

- FM
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This just in from the department of redundancy department...

reply to FutureMon
look at it as a straight line.
--------------------------------------------------------P--------D
--------------------------------------------------------P--------D
--------------------------------------------------------P--------D

for every dash you are paying interest. if you count the dashes between PAYMENTS not the due date, that is the actual amount of interest being charged. Paying 10 days early all the time will reduce the amount of interest being paid but not more than at most, $200 at the end. maybe if I get bored, I will write a prog to figure it out for you.
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I have a restraining order against the voices in my head.

...But you're assuming that the dashes (days) that appear between P and D still accumulate interest - and they don't. Those dashes go away because I paid the amount due before the due date. That's the whole thing about simple interest loans that makes them different from standard loans like mortgages...

As far as the programming:

So long as you do it because you're bored.

While you're at it; don't forget that I'm also paying extra principle with each payment.

Normal payment = $376.96. My payment = $400.00, 10 days early each month...

- FM
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This just in from the department of redundancy department...

so you are saying that you are not paying interest on the balance between the date you pay and the due date??? how the hell did you work that out? Why don't you pay on day 1, then you would have no interest.
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I have a restraining order against the voices in my head.

it's all in your contract terms.

also - note: i think the dashes after the payment are not zero. the terminology used on the web is a little confusing. when they say you don't have to pay interest on the days after you pay early, they mean you don't have to pay the interest value you would have had to pay. you are still accruing interest on the remaining principal during those days... just at the lower principal rate. i think they're assuming you know that when they say a simple interest loan accrues interest every day. so, instead of accruing $4/day for 30 days, you accrue $4/day for 20 days, then $3.90/day for how ever many days you wait until your next payment. so, by paying early, you've erased $1.00 from your out-of-pocket for the loan.

at least, that's how it makes more sense to me. alternatively, they could just put in your contract that you cannot pay any payment earlier than 10 days before it's due, etc - so that they get their minimum vig off the remaining principal each month. if that's the case, then you save more/day by paying off early ($4/day totaling $40 on those first 10 days), but I don't know how they compute the next month if you're ever late. worst case is that you pay $4/day for the first month, then continue with $4/day for the second month until you make both monthly payments (whatever qualifies as a monthly payment - it's got to be more than just the accrued interest, right?).

you can still beat a conventional mortgage even with a limit on pre-pay date/payment, but the whole process is a risk compared to conventional loans since there's no grace period if you miss a payment or whatever. also, from what i can tell, it's not when you pay that matters, it's when your lender posts the payment to the account, and they can drag their heels.

if you figure out the terms of the loan, let us know. rest assured that they have a built-in return on the loan that's not too far from what you'd pay if you made each payment on the due date or if you'd have gone with a conventional loan.

»www.mtgprofessor.com/a%20-%20amo···work.htm

I just did some additional math. I had an epiphany while I was outside on a smoke break. You may be right about the interest still accruing, but at the lower principal amount, however.

Here were my thoughts. The payment is split between principal and interest. By paying an additional $23 towards my loan the table looks something like this:

Month 1 : principal = $168.72, Interest = $231.28
Month 2 : principal = $170.97, Interest = $229.03
Month 3 : principal = $173.24, Interest = $226.76

Now, here's the epiphany. Each month, the Interest can be divided by 30 to get a daily interest amount:

Month 1 Daily amount = $7.71
Month 2 Daily amount = $7.63
Month 3 Daily amount = $7.56

...And it is these daily amounts you would deduct 10 days worth from, each month because I'm paying 10 days early.

Month 1 = $77.09
Month 2 = $76.34
Month 3 = $75.59

When I follow it all the way down the 72 month path, because the interest is reducing each month, so are the savings - the total interest saved ends up being $2916.65 (or 7.7 months off the term of the loan).

I have all this stuff in a spreadsheet, but they aren't all "formula-ized" yet so I can't produce a sheet that actually shows the new loan balance after each payment minus the 10 days of saved interest, because my original sheet already had the principal and interest split out based only on paying the extra $23 per month - not paying early... I'd have to figure the calculations to adjust the principal and interest and new loan balance after subtracting the savings each month...

- FM
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This just in from the department of redundancy department...

1 - is 10 days the maximum time you can pre-pay by?

2 - that ~$7/day is based on X principal (your total loan amount). when you pay early, you still have x' = x - ~$150 as your new principal. i find it hard to believe they just float you on that x' principal for 10 days... my guess is that you're still charged the interest on the x' principal for those 10 days, which, by your calculations, means you're saving about 10 cents for 10 days in the first month, or about $1.

i'm a little worried about your end result being that you end the loan 7 months early... i think you're comparing paying early AND paying additional principal each month against paying on time and NOT paying additional principal each month. a 7 month diff seems to be pretty hefty savings if you're comparing just the early pay and not the additional principal.

$18500 loan? 6 years? about a total of $9k interest? - that's the cost of a conventional loan, i believe.
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Catapultam habeo. Nisi pecuniam omnem mihi dabis, ad caput tuum saxum immane mittam.

Actually, the principal loan amount is around $17400. The interest is calculated and added to the loan on a daily basis, then billed in a calculated split between principal and interest for that month.

When it's all said and done, if I paid just the regular payment on the due date for the full 6 years, I'll have paid a total of $9740 in interest, making the actual amount paid around $27,100

That said, doesn't it seem more likely that a savings of $2916 is feasable (what with paying extra and paying early each month).

I'll still have paid about $24184 for my $17,400 vehicle in the end.

- FM
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This just in from the department of redundancy department...

oh, yes, but that doesn't say much about, specifically, the paying early. i think you over-paying each month is the vast majority of the savings. i believe you can overpay with a conventional loan as well... but without the risk. i may be wrong, i'm just looking at general trends on the web, not what specific contracts you were offered, and i have very little wisdom in such areas. in reality, at that interest rate, any extra payments you can make to end the pain early are great. especially since the fed just promised another 1.5 years of 0% to the banks. if the simple interest loan makes that easier to do, then that's the way to go.
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Catapultam habeo. Nisi pecuniam omnem mihi dabis, ad caput tuum saxum immane mittam.

Simply paying the amount due, on the due date, by the end of the 72 month term, I'll have paid $9741 in interest.

Adding in the extra $23/mo, the total interest paid drops down to $8749.92.

In paying the extra $23/month, the net cost of that ends up being an additional $1520 - but it's only for 66 months...The loan term is not 72 months any more because by paying the extra each month towards principal, it ends up dropping 6 payments off the term in total, which would have cost me $2261.

@ $376.96/mo ---> $9741 + $0000.00 - $0000.00 + $17400 = $27,141
@ $400.00/mo ---> $8749 + $1520.64 - $2261.76 + $17400 = $25,407

$27141 - $25407 = $1736

This is a handy-dandy online calculator (unfortunately it doesn't allow for figuring paying days early...I can't find a freakin thing online - even a site that would teach me how to do it as if I were studying it)

»www.bankrate.com/calculators/mor···tor.aspx

- FM
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This just in from the department of redundancy department...