Simple Interest 101

Objectives

 Learn how Simple Interest works

 Calculate Simple Interest

 Communicate Simple Interest concepts

to customers
Common Misconceptions

Customer gets Customer has a daily

charged daily interest interest of $24.99
only when they are when the interest rate
delinquent. is 24.99%.

If the daily interest is Customer has 10 days

$10.30, that is $10.30 before they accrue
of extra interest each interest.
day they are late.
Overview

Let’s watch…
What is Simple Interest?

Simple Interest is a method of calculating interest.

Under the Simple Interest method, interest accrues
daily and assumes payments will be made on the
scheduled due date. The amount of interest accrued
daily may vary based on the amount of the principal
balance and the number of days between
payments.
How does it work?

When payments are made early, more frequently or for

greater amounts, more of the payment will be applied to
principal and less interest will accrue so less interest is
paid over the life of the loan.
How does it work?

Simple Interest loans may take longer to pay off if

customers make their payments late or receive
deferments or modifications. Interest will continue to
accrue during a deferment or modification, which means
the customer will pay more in interest resulting in a
balance remaining at the end of the term.
Calculating Daily Interest

Rate 13%
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$18,000 x .13 / 365 = $6.41

In the example above, the Daily Interest on

this account is $6.41 based on the current
principal balance of $18,000.
Calculating 30 days of interest

Now that we know the Daily Interest is $6.41,

we need to calculate the amount of interest that
would accrue in the first 30 days of the loan.

$6.41 x 30 = $192.30
What happens when a payment is made?

If the customer makes a $500 payment 30 days

into the loan, how much will apply to interest and
how much will apply to principal?

$6.41 x 30 = $192.30 to interest

$500 - $192.30 = $307.70 to principal

The new principal balance is…

$17,692.30
What happens when a payment is made?

The new principal balance is $17,692.30.

We now need to calculate the new
Daily Interest accrual.

$17,692.30 x .13 / 365 = ???

The new Daily Interest is…

$6.30
Lets try it…

Helen is looking for a car. She notices that her local credit
union has loans with a 10% interest rate. How much would
Helen’s Daily Interest be based on an original principal
balance of $12,500?

$12,500 x .10 / 365 = $3.42

How much interest would Helen accrue in the first 30 days

of her loan?

$3.42 x 30 = $102.60
Let’s try it with a payment

Helen made a $400 payment 30 days after the purchase of

her vehicle. How much went to interest and how much went to
principal?

$3.42 x 30 = $102.60 to interest

$400 - $102.60 = $297.40 to principal

What is Helen’s new principal balance? How much is Helen’s

new Daily Interest accrual?

$12,202.60 x .10 / 365 = $3.34

Let’s try it with a payment

Helen made a $400 payment 45 days after the purchase of

her vehicle. How much went to interest and how much went to
principal?

$3.42 x 45 = $153.90 to interest

$400 - $153.90 = $246.10 to principal

Helen’s new principal balance is $12,253.90. How much is

Helen’s new Daily Interest accrual?

$12,253.90 x .10 / 365 = $3.36

Let’s try it with a payment

Helen made a $400 payment 60 days after the purchase of

her vehicle. How much went to interest and how much went to
principal?

$3.42 x 60 = $205.20 to interest

$400 - $205.20 = $194.80 to principal

Helen’s new principal balance is $12,305.20. How much is

Helen’s new Daily Interest accrual?

$12,305.20 x .10 / 365 = $3.37

Daily Interest Comparison

Original Daily Interest Rate (DIR) = $3.42

If payment received after 30 days, new DIR = $3.34

If payment received after 45 days, new DIR = $3.36

If payment received after 60 days, new DIR = $3.37

This is not an exact science

Throughout Helen’s loan, she had 4 deferments, a Due

Date Change (DDC) for 29 days, and was over 30 days
late 15 times.

4 DEFERS 120 days

1 DDC 29 days
15 over 30 DPD 450 days
TOTAL 599 days
This is not an exact science

The Daily Interest accruing at the time of each occurrence

will determine how much additional interest has accrued on
the loan.

With this type of history, it would take Helen longer to payoff

her loan than it would if she had paid as agreed per the
terms of the contract.
Take a look…
Transaction History Review
Financial Tab Review
Simple Interest and Payoff
Simple Interest and Payoff
Simple Interest and Payoff
Simple Interest and Payoff

Start counting days from the last payment to the “good through” date on the
payoff. In this case we are requesting the payoff on 9/24/12 which has a
“good through” date of 10/08/12. This equals 47 days of interest that will
accrue since the last payment.
Simple Interest and Payoff

Current Principal Balance $3,135.60

Daily Interest Since Last Payment $ 35.25

Fees $ 15.39

Total $3,186.24
FAQ’s

Why isn’t my balance going down? I have made X

payments already.

Interest accrues daily based on the current principal balance.

When a loan is new, the principal balance is higher. Therefore,
a greater amount of your payment goes to interest. As the loan
matures more of your payment will be applied to your principal
and bring your balance down faster with regular payments.
FAQ’s

I don’t see anywhere on my contract where it says I signed

up for this. Where does it say this?

This is located on the back of page one. Typically, this is found

in the top left corner on line “A” or “1” describing daily interest
accrual.
FAQ’s

I have a fixed interest rate, so how is it changing all the

time?

Your account has a fixed rate. Your rate is not changing. Your
account accrues interest on a daily basis based on the current
principal balance. This means as your principal balance gets
lower, the amount of interest that accrues is reduced.
FAQ’s

If the contract term is 60 payments, why would the customer

pay 68 months?

The contract is 60 payments of “X” amount on “X” due date. This

is assuming that all payments are made for their scheduled
amount on their scheduled due date. Interest will continue to
accrue if there are late payments, deferments, due date changes,
or loan modifications on the account. This means more of the
customer’s payment will be applied to interest and less to
principal, which may extend the amount of time it takes to pay off
an account.
 Best Practices

DO!

 Advise the customer you are giving an estimated breakdown.

 Use the term Daily Interest when referring to the daily accrual
of interest.

 Remain calm. If you get frustrated, the customer is likely

to mirror that behavior. BE MORE!!!
Best Practices

DON’T!

 DO NOT use words like FEE or PENALTY. Simple Interest

is neither.

 DO NOT use Simple Interest as leverage or a scare tactic to

get a payment from a customer.
Let’s practice…

Check for understanding

Review

 Learn how Simple Interest works

 Calculate Simple Interest

 Communicate Simple Interest concepts to

customers
Questions
SCUSA Employee Development