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To determine the amount of interest you will be required to pay each month, use the following formula called the Simple Daily Interest formula:
Simple Daily Interest Formula
Number of days since last payment
x
Principal Balance Outstanding
x
Interest Rate Factor
=
Interest Amount
Practice Example: Let's say the remaining balance on your loan is $9,500.00. 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 $9,500.00 (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 $9,408.66 after the $160.00 payment was applied.
The interest rate factor is used to calculate the amount of interest that accrues on your loan. It is determined by dividing your loan's interest rate by 365.25 (the number of days in a year). See the following table to see some examples of interest rate factors.
| Interest Rate |
Converted to Decimals |
Divide by 365.25 |
Interest Rate Factor |
|---|---|---|---|
| 8.99% | .0899 | .0899/ 365.25 |
.00024613 |
| 8.25% | .0825 | .0825/ 365.25 |
.00022587 |
| 7.59% | .0759 | .0759/ 365.25 |
.00020780 |
Interest accrues on a daily basis on your loans. Factors such as: the number of days between your last payment, the interest rate, and the amount of your loan balance, determine the amount of interest that accrues each month.
