Simple Interest Financing
Simple Interest Finance (SIF) is a common method of calculating finance charges, based on the agreed terms (amount financed, number of payments, interest rate/APR, due date, etc.) of a finance contract. Payments are allocated between principal and accrued finance charges (interest). Finance charges shown on the contract assume a customer will make the stated payment amount on the stated due date, for the full length of the contract term.
Step 1: Convert APR into a decimal by dividing by 100
Step 2: Multiply the decimal by the outstanding principal balance
Step 3: Divide the result by 365 calendar days. This is referred to as the per diem, or daily interest. This amount will change as the principal balance decreases.
Step 4: Multiply the per diem by the number of days since the last payment applied to your account.
The result equals the amount of finance charges accrued for a certain period, or number of days.
Balance X (APR/100) / 365 calendar days
X Days Between Payments
= Finance Charges Accrued
Assuming an outstanding principal balance of $10,000.00, an APR of 12%, and a scheduled monthly payment of $300.00, the daily finance charge is calculated as:
(10,000 X 0.12) / 365 = $3.287 per day
Finally, since SIF considers the number of days between payments received; paying earlier or later will affect the total amount of accrued finance charges. Using the value of $3.287 per day and a payment of $300.00:
|Days between payments||15||30||45|
|Accrued finance charges||$49.31||$98.61||$147.92|
|Amount applied to principal||$250.69||$201.39||$152.08|