Find Me Funders
Simple interest
Also called interest-bearing, per diem interest, actuarial interest.
Interest charged on the outstanding principal for the time it is actually outstanding, so paying down principal reduces the charge immediately and paying off early stops it entirely.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
The defining feature is that time and balance both matter. Periodic interest is the balance multiplied by the periodic rate, frequently computed per diem as balance × annual rate ÷ 365 × days elapsed. Reduce the balance and the next day's charge falls.
The two structures it is confused with
Front-loading is not a trick
On a level-payment amortising simple-interest loan, each payment covers accrued interest first and the remainder reduces principal. Early payments are therefore mostly interest and later payments mostly principal. That is arithmetic following from a declining balance, not a penalty structure, and it costs you nothing if you prepay — the interest for months you never reach was never charged.
Why it matters practically
It is the only common structure in which making an extra payment reduces your total cost. On an add-on or factor-rate product, paying extra generally does not reduce the total owed at all.
Where this one catches people
"Simple interest" gets used in sales conversations to mean "not compound", which is not the distinction that affects you. Ask the question that does, and ask it in writing: if I pay this off in full at month six, what exactly do I owe?
- On a true simple-interest loan: the principal balance plus interest accrued to that date.
- On an add-on or precomputed loan: the total of payments less a rebate computed by a method named in the contract, which is a different and larger number.
- On a factor-rate advance: usually the entire remaining purchased amount, unless the agreement contains a written early payoff discount. A verbal promise of one is worth nothing against an integration clause.
The second confusion to avoid: an amortisation schedule showing mostly interest in year one is not precomputed interest and is not the Rule of 78s. It is what a declining balance looks like on paper.
Worked through
Illustrative. 50,000 at 14 percent simple interest.
Per diem interest: 50,000 × 0.14 ÷ 365 = 19.18 a day. Hold the full balance 30 days and the interest is about 575. Pay 10,000 off the principal and the per diem drops to 40,000 × 0.14 ÷ 365 = 15.34 — the saving starts the next day, without renegotiating anything.
Now the same 50,000 on a 14 percent add-on basis for two years. Interest is 50,000 × 0.14 × 2 = 14,000, fixed at signing. Total of payments 64,000; monthly payment 2,666.67.
That is not a 14 percent loan. Because you repay steadily, the average balance outstanding over the two years is roughly half the original, so the same dollar cost against a much smaller average balance works out at close to 25 percent a year on a simple-interest basis — the exact figure depending on the payment schedule.
Identical headline number, roughly double the cost.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
Read next
Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
-
per diem interest on 50,000 at 14% is 19.18 a day, about 575 over 30 days, falling to 15.34 after a 10,000 principal reduction
example50,000 x 0.14 / 365 = 19.1781 a day; x 30 = 575.34. 40,000 x 0.14 / 365 = 15.3425. All three figures as stated.
-
the same 50,000 at 14% add-on over two years costs 14,000, totals 64,000 at 2,666.67 a month, and works out close to 25% a year
example50,000 x 0.14 x 2 = 14,000; 50,000 + 14,000 = 64,000; 64,000 / 24 = 2,666.67. Solving 50,000 = 2,666.67 x (1-(1+i)^-24)/i gives i = 2.0770% a month; x 12 = 24.92% nominal annual (EAR 27.98%). 'Close to 25 percent' is correct; 24.92 / 14 = 1.78 supports 'roughly double'.
Simple interest — common questions
What does simple interest mean?
Interest charged on the outstanding principal for the time it is actually outstanding, so paying down principal reduces the charge immediately and paying off early stops it entirely.
Where does simple interest catch people out?
"Simple interest" gets used in sales conversations to mean "not compound", which is not the distinction that affects you. Ask the question that does, and ask it in writing: if I pay this off in full at month six, what exactly do I owe?
Is simple interest the same as an interest rate?
Simple interest is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does simple interest apply to?
Working Capital, Term Loan, Business Line of Credit, SBA Loan, Equipment Financing.
Is there a worked example of simple interest?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside simple interest?
Add-on interest, Amortization, Annual percentage rate, Effective APR, Factor rate.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.