Use this loan calculator for a simple calculation of your monthly payment along with interest paid on the loan.
This calculator assumes interest compounding occurs monthly. For additional compounding options use our Advanced Loan Calculator.
To find the monthly payment we solve this equation for Payment; where n is number of months, and i is the interest rate per month in decimal form: ‘( ‘text{Payment}=’dfrac{‘text{Loan Amount} ‘times i(1+i)^n}{(1+i)^n-1} ‘)
Simple interest loans are one of the most common types of loans that consumers take out. From car loans to personal loans simple interest loans are everywhere. While the concept is straightforward simple interest loan amortization schedules can seem complicated. In this article, we’ll break down exactly what simple interest loan amortization is and how it works.
What is Simple Interest?
Let’s start with the basics – what is simple interest? Simple interest is a way of calculating interest owed based solely on the principal amount interest rate and time period of the loan. With simple interest loans, interest does not compound as it does with other types of loans like compound interest loans.
The simple interest formula is:
Interest = Principal x Interest Rate x Time
For example if you took out a $10.000 personal loan with a 5% interest rate for 2 years the interest owed would be
$10,000 x 0.05 x 2 = $1,000
So the total amount repaid would be $11,000 – the original principal of $10,000 plus $1,000 in simple interest.
What is Amortization?
Amortization refers to the process of paying off a loan over time through scheduled payments. An amortization schedule lays out how each payment is applied – part to interest owed and part to the principal balance.
As more payments are made over the course of the loan, the amount applied to interest decreases while the amount applied to principal increases. This is because as the principal is paid down, there is less interest owed each month.
Simple Interest Loan Amortization
When you combine simple interest with amortization, you get a simple interest loan amortization schedule. This schedule shows how each payment breaks down between interest and principal so that by the end of the loan, the full principal has been repaid along with all interest owed.
Here’s an example simple interest loan amortization schedule:
- Principal: $10,000
- Interest Rate: 5%
- Loan Term: 2 years (24 monthly payments)
| Payment | Interest | Principal | Remaining Balance |
|---|---|---|---|
| 1 | $41.67 | $208.33 | $9,791.67 |
| 2 | $40.47 | $209.53 | $9,582.14 |
| 3 | $39.26 | $210.74 | $9,371.40 |
| … | … | … | … |
| 24 | $8.33 | $241.67 | $0 |
As you can see, with each payment, the interest owed decreases as the remaining principal balance goes down. The principal portion of the payment increases over time. By the final payment, the principal portion is enough to repay the remaining balance in full.
Benefits of Simple Interest Loans
There are a few key benefits of simple interest loans compared to compound interest loans:
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Lower interest costs – With simple interest, borrowers only pay interest on the original principal. Interest does not compound over time.
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Transparency – Simple interest loan amortization schedules clearly show how much goes to interest vs principal each month. This helps borrowers understand exactly how their payments are applied.
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Fixed payments – Monthly payments on a simple interest loan stay the same over the life of the loan. This allows for predictable budgeting.
Common Examples of Simple Interest Loans
Some of the most common examples of simple interest loans include:
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Auto loans – Many car loans use simple interest rather than compound interest. This helps keep payments manageable.
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Personal loans – From debt consolidation to home improvements, personal loans often use simple interest.
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Short-term business loans – Small business loans are frequently simple interest loans. This can help with cash flow for businesses.
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Some mortgages – While most mortgages are compound interest, simple interest mortgages do exist. These have fixed payments over the life of the loan.
How to Calculate a Simple Interest Loan Amortization Schedule
If you need to calculate a simple interest loan amortization schedule manually, follow these steps:
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Determine the loan amount, interest rate, and loan term.
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Calculate the total interest owed over the full loan term using the simple interest formula.
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Divide the total interest by the number of payment periods to get the interest portion of each payment.
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Subtract the interest portion from the fixed monthly payment to get the principal portion.
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For each subsequent payment, recalculate the interest based on the remaining principal balance.
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Repeat steps 3-5 to calculate the full amortization schedule.
Today, many simple interest loan calculators and amortization calculators are available online to easily generate amortization schedules. This eliminates the need for complex manual calculations.
The Bottom Line
While simple interest loan amortization may seem complicated at first glance, it’s simply a method of breaking down loan payments into principal and interest. Following a set amortization schedule ensures loans are fully repaid by the final payment date. Understanding how amortization works helps borrowers fully comprehend interest costs and the impact of their payments over time when using simple interest loans.
Example Loan Payment Calculation
Suppose you take a $20,000 loan for 5 years at 5% annual interest rate.
n = 5 × 12 = 60 months i = 5% / 100 / 12 = 0.004167 interest rate per month
Then using the formula with these values: ( text{Payment}=dfrac{text{Amount} times i(1+i)^n}{(1+i)^n-1} ) ( =dfrac{($20,000)(0.004167)(1+0.004167)^{60}}{(1+0.004167)^{60}-1} ) ( =$377.42 )
Amortizing vs. Simple Interest Loans: Which Is Better for Your Business?
What is simple interest amortization calculator?
Simple Interest Amortization Calculator is an online personal finance assessment tool which allows loan borrower to find out the best loan in the finance market. The principal amount, simple interest rate and maturity period are the key terms to generate the amortization schedule, monthly payment and total interest.
How does a loan amortization calculator work?
This loan amortization calculator figures your loan payment and interest costs at various payment intervals. Simply input the principal amount borrowed, the length of the loan and the annual interest rate and the calculator does the rest. Do you need to calculate a loan payment including interest and principal?
What is a simple interest loan?
With a simple interest loan, you’ll pay the same amount toward both principal and interest with each payment. Amortizing loans also tend to have compounding interest, whereas simple interest loans have (you guessed it) simple interest. If your loan has a simple interest rate, the interest is calculated only on the principal amount.
Are amortizing loans a good idea?
Some amortizing loans will allow early repayment, thereby erasing any additional interest you’d otherwise have to pay. With a simple interest loan, you’re more likely to incur a prepayment penalty, as you’re paying the same amount to interest on every scheduled payment and the lender is counting on that money.