What is a Simple Interest Loan and How is Interest Calculated?
In a simple interest contract, the finance charge (“interest”) is calculated as a percentage of the balance of the amount financed (“principal balance”) for the number of days from the last payment of principal. Interest is not compounded, which means that interest is paid only on the principal and not on previously accrued interest. Payments are allocated between interest and principal, first to any accrued and unpaid late fees, then to interest accrued since the last payment of principal, and then to reduce the principal balance.
