What Type of Loan Uses the Simple Interest Formula?
Loans which either pay interest once at maturity or pay interest only on a periodic basis typically use the simple interest formula. Payday and Title loans are the biggest users of this interest calculation method because interest is due at maturity. However, what about personal, student, car, and mortgage loans? These types of loans do not use the simple interest formula, however the interest calculation formulas they do use are based off of the SI formula. Why Can’t the Simple Interest Formula Be Used For My Mortgage or Car Loan? One reason for why the SI formula is not used for mortgage and car loans is due to a process called amortization. Amortization is basically the paying down of a larger amount over a set period of time. With mortgages, car loans, and similar loans the amount borrowed is payed down over a set period of time. Typically, these pay downs occur monthly with interest paying on the same monthly basis. Since the principle is paid down each month, this means the princ
