Simple Interest Financing

Simple Interest Financing (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 accrued finance charges (interest) and principal. 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.  

SIF Formula

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

Sample calculation

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


What you need to know

Consistently paying early and/or more than the minimum amount due over the life of the contract will result in LESS accrued finance charges.  Doing this can save money and may result in paying off a contract early.

Frequently paying late and/or less than the minimum amount due will result in MORE accrued finance charges.  Also, adding time in-between payments (for example extensions, due date changes, and rewrites) means you will pay MORE in finance charges and may take longer to pay off your contract.

For additional information on Simple Interest Financing, please review the Paying Additional Towards Principal FAQs. You can also refer to your Retail Installment Contract.

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