If you have a daily simple interest (DSI) loan, the word “daily” indicates that interest is calculated every day. Thus, the amount you owe on a DSI loan increases with each passing day.
However, because DSI loans use a simple interest calculation, interest does not compound. It’s important to learn how to calculate daily simple interest so you know how much you will owe on a DSI loan.
Daily Simple Interest (DSI) Explained
When you take out a loan, you likely expect to pay interest in addition to the original amount of the loan. However, the way interest is calculated is not the same for all loans.
With daily simple interest, only the remaining balance (principal) on the loan is used in the calculation. This is different from compound interest, where interest that accrues is added to the principal and thus included in subsequent interest calculations.
Because DSI loans calculate interest daily and only use the principal in the calculation, paying on time will help you pay off the loan more quickly than making late payments. Paying early will be even more beneficial, as will paying more than the minimum.
How to Calculate Daily Simple Interest
If you take out a loan with daily simple interest, it means interest will be calculated every day on the loan. In addition, interest is only calculated using the principal of the loan.
Simple interest is calculated as:
I = P * R * T
And:
P = Principal
R = Daily interest rate
T = Time between payments
The last part of the formula, T, is the time between payments. That refers to the amount of time that interest has been accruing. For example, if you pay interest every month, then 30 days may have passed since your last payment. Thus, we multiply the daily interest by 30 and then multiply that rate by the principal to determine how much interest you owe.
What Happens if I Don’t Pay the Daily Simple Interest on My Personal Loan?
If you pay the daily simple interest on your personal loan late, more of the payment will go toward interest, and less of it will go toward reducing the remaining balance. This is because more time has passed, and the loan has accrued more interest than it would have if you had paid on time.
For example, suppose you have a $3,000 loan with a 5% annual simple interest rate, calculated daily. On this loan, you would have $12.33 of interest after 30 days. If you pay $75 toward that loan, you pay the $12.33 interest and reduce the principal by $62.67. But suppose you wait 60 days to pay instead. Interest is still accruing on the original $3,000 principal, so you now owe $24.66 in interest. Now, your $75 payment only reduces the principal by $50.34.
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Comparing Daily Simple Interest vs Fixed Interest
Daily simple interest and fixed interest are not mutually exclusive. In fact, DSI loans are usually fixed-rate loans. In other words, the interest rate does not change for the life of the loan. This is common with auto loans and short-term personal loans.
One difference you might see is with mortgages. These loans are usually calculated monthly instead of daily. As a result, paying a few days early won’t reduce how much interest you owe. That said, paying more than the minimum on the mortgage can reduce how much you owe overall.
Comparing Daily Simple Interest vs Variable Interest
DSI loans are usually fixed-rate loans, so your payments won’t change for the life of the loan. Variable interest loans, however, have a rate that fluctuates according to market rates. Monthly payments fluctuate along with the rate, so it may be hard to predict how much you’ll have to pay every month.
Nevertheless, interest rates can be lower on variable-rate loans, especially at the beginning of the loan term. Variable-rate loans are common with mortgages, which again means interest is often calculated monthly instead of daily.
How Do Daily Simple Interest Loans Work?
With DSI loans, you generally make monthly payments. Some of each payment goes toward interest and the rest reduces the principal. The only thing that makes DSI loans somewhat complicated is the fact that their interest is calculated every day. However, this daily calculation also means early payments can help reduce the total amount you pay on a DSI loan.
For example, suppose you take out a $5,000 personal loan with a 36-month term and 12% annual simple interest, calculated daily. We will also assume your monthly payment is $120. If you make your first payment after 30 days, $49.32 goes toward interest, and $70.68 goes toward the principal. However, if you instead make your first payment after 15 days, only $24.66 goes toward interest, and $95.34 goes toward the principal.
Increasing how much you pay also helps you reduce the principal on a DSI loan more quickly. Using the above example, if you paid $240 instead of $120, the interest owed would be the same after both 30 days and 15 days. In other words, all of that extra $120 would go toward reducing the loan’s principal.
Pros and Cons of Daily Simple Interest Loans
Daily simple interest loans can be beneficial for some borrowers, but they aren’t without their downsides.
Pros of Daily Simple Interest Loans
• Interest does not compound — only the principal is used to calculate interest
• Early payments can save you money on interest
• Payments are usually the same amount every month
Cons of Daily Simple Interest Loans
• Interest rates may be lower on variable-rate loans
• Late payments mean interest keeps accruing
| Pros | Cons |
|---|---|
| No compound interest | Late payments lead to more interest |
| Early payments can reduce interest paid | Rates can be higher than variable-rate loans |
| Consistent monthly payments |
Examples of Daily Simple Interest Loans
Two of the most common daily simple interest loans are auto loans and personal loans.
Auto Loans
When you finance a new vehicle, the interest on that loan is often calculated using daily simple interest. For example, suppose you have a $25,000 auto loan with 6% interest and a six-year term.
On this loan, your interest for the first 30 days would be $123.29. If you paid $500 after 30 days, $376.71 goes toward the principal, bringing it to $24,623.29. After 30 more days then, the interest charge is $121.43, leading to a slightly higher principal reduction of $378.57. With each monthly payment, you reduce the principal more.
Personal Loans
Personal loans can be used for a variety of needs; two personal loan examples are covering unex pected medical bills and paying for urgent home repairs.
While there are different types of personal loan, they often use daily simple interest. For example, if you take out a $5,000 personal loan with daily simple interest and don’t make a payment for 30 days, the loan will accrue interest for each of those 30 days. However, the principal after 30 days will still be $5,000.
On the other hand, if you made a $250 payment after 15 days, your principal would be reduced to $4,750. Then, interest would be calculated using $4,750 as the principal for the remaining 15 days that month. Hence, you would immediately reduce how much interest the loan accrues each day.
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More Personal Loan Tips From SoFi:
With a daily simple interest (DSI) loan, interest accrues daily but doesn’t compound. Early payments lead to less interest owed, while late payments increase your interest. DSI personal loans can seem expensive, but they’re a better alternative to more expensive forms of borrowing, such as credit cards.
SoFi Personal Loans have a low fixed interest rate, and loans are available from $5K all the way up to $100K. You can use them for whatever you want: home projects, credit card consolidation, even unplanned events.
FAQ
How do you calculate daily simple interest?
You calculate daily simple interest by multiplying the principal, the daily interest rate, and the number of days since your last payment. This formula is expressed as I = P*R*T.
Is simple interest charged daily?
Simple interest does not have to be charged daily; it can also be charged monthly or annually. However, daily simple interest is always charged daily.
How does a daily interest rate work?
Daily interest is simply a fraction of the annual interest rate. For example, on a non-leap year, the daily interest on a 15% daily simple interest loan would be 15%/365 = 0.041%. Thus, 0.041% is the amount of interest charged per day.
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