Simple Interest

Simple interest refers to an interest structure of a product where interest is not compounded.

Simple interest is a method of calculating and charging interest in the simplest form. One where consumers often think is used for their personal loans, credit cards, etc.

For example, a 4% simple interest rate on a $100,000 principal will result in an interest charge of $4,000 a year.

This is almost non-existent for regular mortgages as they are amortized using different methods for calculation.

So much so that a mortgage that is structured with simple interest rates will expressly state that it is such.

For example, a simple interest mortgage will state that it is one upfront. Otherwise, it would be implied that it isn’t one, and is a standard home loan instead.

Note that simple interest mortgages have interest calculated on a daily basis based on the remaining balance on the day of payment.

The most common simple interest type of loan are car loans.