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How to calculate Daily Simple Interest

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 15th Feb, 2006 10:04am
Daily Simple Interest loan calculation involves a method by which the interest on a mortgage loan is calculated on a daily basis. The loan balance is reduced on the day when the payment is reduced rather than on the day when payment is due.


Under the Daily Simple Interest formulae, the daily interest rate is given by:


Daily Rate= Annual Rate/365

Amount of interest payable each month = Number of days since last payment * principal outstanding balance * Interest Rate factor


Let's take an example where outstanding principal balance is $10000. You've sent in a payment of $170 around 30 days after your previous month's payment. Let's say the interest rate is 8.5% (the interest rate factor is .00022585)


As per the above formulae,
Interest payable each month = 30 * 10000 * .00022585 = $67.7555


Daily Interest = Daily rate * loan balance
Posted on: 15th Feb, 2006 10:04 am
How are you billed for a daily loan that charges daily simple interest if the loan is tied into an index that changes daily. How would you know what your actual payment would be by the due date? In trying to pay the interest early (putting more to principal),.
To determine the amount of interest you will be required to pay on each month, use the following formula called the Simple Daily Interest formula:

Number of days since last payment x Principal Balance Outstanding x Interest Rate Factor
= Interest Amount

Example: Let's say the remaining balance on your loan is $9500.00. You sent in a payment of $160.00, 32 days after your previous month's payment. Your interest rate is 8.25% (interest rate factor is .00022587).

32 (days) x $9500.00 (PBO) x .00022587 (interest rate factor)

You would pay $68.66 toward interest and $91.34 toward the principal balance. This would leave you with a loan balance of $9408.66 after the $160.00 payment was applied.

I hope this will give you a fair idea about the calculation.
Posted on: 15th Feb, 2006 10:22 am
Hi Pat,

Welcome to MortgageFit Forums.

I shall give it a try to explain you the method of calculation but it's better if you take the help of a professional rather than trying yourself.

In simple interest loan your annual rate is divided by 365 and is thus converted into a daily rate. The daily rate is multiplied by the loan balance to calculate the interest that becomes due for the day.

The amount that is obtained as a result is recorded in a special accrual account, which increases by that amount every day. No interest gets accrued on this account.

After the receipt of the payment it is applied first to the accrual account and the left over is used to lower the balance. As the balance decreases, a new and smaller daily interest charge is calculated.

Looks a bit complicated?:) I think once you get the calculation done for your details with a professional it will be easier to you.

God bless you.

For MortgageFit,
Samantha
Posted on: 15th Feb, 2006 10:28 am
Here you have a flat rate of interest that is not compounded and is usually expressed as an annual rate.

The calculation for one day of simple interest is

(loan balance x interest rate)/365 = daily amount of interest

James
Posted on: 15th Feb, 2006 10:42 am
what is the formula to calculate interest rate factor.

Regards
Sanwar
"sanwar.singh@fiserv.co.in"

[Email address deactivated as per forum rules. Thanks.]
Posted on: 10th Aug, 2007 01:26 am
Hi Sanwar,

If we consider the principal amount to be P, the number of years to be n, the annual interest rate to be i, then we can find out the amount to be received after the specified n years by using the formula:

A = P(1+ni). Here A is indicated as the amount to be received.

Now, to calculate the interest rate i, we can use the following formula:
i = ([A/P]-1)/n.
Posted on: 16th Aug, 2007 09:32 pm
larry could you please give an example?
Posted on: 16th Feb, 2008 01:15 pm
Mike,

You can refer to my post above for the calculation of interest.
Posted on: 18th Feb, 2008 01:13 am
Is "daily simple interest" in my best interest, versus a regular fixed annual rate?
Posted on: 11th Jun, 2008 12:39 pm
Welcome Joanne.

Whether daily simple interest is better or not, will depend more upon how much you can pay, your loan amount, the current rate offered in both simple interest and annual interest rate types etc. By the way, are you talking about your mortgage? can you give me some more details of your loan so that i can give you a better idea.

Thanks.
Posted on: 11th Jun, 2008 10:44 pm
Although the formulas posted are useful, you would be best getting a proffesional to look at your debt. Nothing worse than miscalculation leading to money dificulties.
Posted on: 12th Jun, 2008 07:22 am
I have plugged numbers in each of the calculations above and none of them come out right? in the opening example daily rate is annual rate divided by 365. if the annual rate is 8.5% then the daily rate would be .00023287 but you use .00022585 as the interest rate factor. why the difference?
Posted on: 09th Sep, 2008 08:36 am
it doesn't look like larry's answer has anything to do with Sanwar's question. Sanwar asked how to calculate interest rate factor and larry's answer has to do with "the amount to be received after the specified years". usually i can follow these things but even adonis' example 8.25% divided by 365 is .00022602 not the number he used for interest rate factor .00022587.
Posted on: 09th Sep, 2008 08:55 am
well O'Connor, can you recalculate the figures here?
Posted on: 12th Sep, 2008 02:13 am
i am not the teacher but the student. i am trying to understand.
Posted on: 14th Sep, 2008 10:22 pm
if i take Rs. 50000 on loan and return it in twelve installment of Rs. 5000 per month. than what will rate of interest?
Posted on: 24th Sep, 2008 03:46 am
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