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The pros and cons of using a simple interest calculator

You normally calculate the monthly rate of interest by dividing the total APR by 12 and multiplying this figure by the principal. However, the simple rate of interest is calculated by dividing the APR by the number of days in the month. This figure is then multipled by the outstanding balance on a daily basis. Find out when you will and will not save money with a simple interest calculator.

How does a simple interest calculator save you money?

Making additional payments towards the debt
You are able to pay back the money you owe on a home mortgage or unsecured personal loan a lot faster when paying a simple interest rate. Interest is calculated on a daily basis. So, you can clear the debt in a fraction of the normal time. Make additional lump sum payments from savings, inheritance, over-time and bonuses to reduce the principal (amount you owe). You should also make payment as soon as you are billed so you do not accrue any extra daily interest. As your level of indebtedness goes down, the amount of interest you pay will start to fall at an accelerated rate. This is because a higher proportion of your future monthly payment goes towards reducing the principal and not paying off the interest that has accrued on the balance.

When will simple interest calculations could cost you money?

Making payment within the designated grace period
It has never been in your interests to make late payments because you pay additional charges. Given that interest is calculated on a daily basis, even when this practice is permitted, it is inadvisable to delay paying for a few extra days. If you like to pay your loan on a set date, such as the 15th of the month (two weeks after the date you were billed), a simple interest loan calculator will end up costing you money. You have been billed on the first of the month and interest is added to the principal each day. The customer who stands to reduce the amount of interest they pay should be a prompt payer and not someone who delays payment for as long as possible. You are not breaking the rules, but you will cost yourself additional money. Simple interest calculations heavily favour borrowers who prefer to pay immediately and don't take advantage of the grace period.

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