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Simple Interest Explanation
A simple explanation for simple interest.
When financing your vehicle with Southeast Toyota Finance, you’ll receive a “simple interest” retail installment contract from us. Interest will accrue every day. But unlike some credit cards or mortgage lines of credit, you only pay interest on the unpaid principal and not on the interest. Every month you make a payment, a portion of your money is applied to any interest that has accrued and is unpaid since your last payment. The rest of your payment then goes towards the unpaid principal, and any other amounts you may owe. Let’s see how this works.
Simple Interest Formula and Example
To calculate how much you’ll pay in interest on your next payment, you’ll first need to calculate your current “per diem” (how much interest accrues per day).
| Current principal balance × APR ÷ 365 |
| = Current per diem |
Note: if it's a leap year, divide the current principal balance by 366.
Then, you simply multiply your per diem by the number of days since your last payment.
For example, say you have a new Toyota vehicle with an unpaid balance of $20,000, an APR (Annual Percent Rate) of 5% and a monthly payment of $377.
| $20,000 × 0.05 ÷ 365 |
| = $2.74 |
Now that you have your current per diem, you can calculate your interest for the current payment. You need to multiply your current per diem by the number of days since your last payment. We'll assume you make your payment on time, every month. So, it's been 30 days since your last payment.
| $2.74 × 30 = $82.19 |
You’ll pay $82.19 towards interest on this payment. The rest of your monthly payment, $294.81, would go towards your principal.
| $294.81 | $82.19 |
| Principal | Interest |
 |  |
Paying Early
But what happens if you decide to make your payment earlier? Your monthly payment will stay the same, but more of that payment will be used towards paying down your principal.
If you paid five days earlier, you would only pay $68.49 in interest.
| $2.74 × 25= $68.49 |
That means $308.51 would go towards your principal. By paying five days early, you would pay $13.70 less in interest.
| $308.51 | $68.49 |
| Principal | Interest |
| |
Paying Late
Now, what happens if you forgot about your car’s payment until five days after it was due. You’ll end up paying more in interest and less of your payment will go towards your principal.
| $2.74 × 35 = $95.90 |
Almost $100 of your monthly payment would go towards interest, with only $281.10 being used to reduce your principal. That’s $13.70 more in interest compared to if you would have paid on time.
| $281.10 | $95.90 |
| Principal | Interest |
| |
Summary
By consistently making your monthly payment early, you'll pay less in interest over the length of your contract. This could help you pay off your vehicle earlier.
However, if you continually make your payment late, you'll accrue more interest charges and possibly late fees. Which means it could cost more to pay off your vehicle.