Simple Interest May Not Be So Simple to Some
I have been asked to explain simple interest by three people in one day. I thought it was a joke at first because I knew all three of the people and I thought that they were messing around. NOT!!
Two of them had purchased cars this year and were having a problem with the lender and one was at the dealership trying to understand what in the world simple interest is and how it works.
Simple interest can be a good or bad thing depending on what you purchased, for how much you purchased it and how long you wish to pay for it.
Simple interest is taken out of each payment you make towards your purchase first. After the simple interest has been taken out the remainder of that payment goes toward your principle balance (price of what you purchased before interest). Now you have a new balance and this process starts over. If you are late on a payment then you are paying additional interest for everyday that you are late and you are paying that interest on the previous months balance (you haven’t paid the current month because you are late) and this continues until you are caught up.
Best practices would suggest that you always pay more toward your principal balance.
That you are never late on your account.
Pay early when possible.
Pay the account off as fast as you can.
Keep a log of your payments and what your balance.
Reconcile the account every time you are late to understand what you still owe and why.
If you don’t want this type of loan. Don’t take it! If you know you are going to be late, this is probably not the loan for you. Most lenders that use this lending system will still charge you a late fee. Now you have a late fee tacked onto the increased interest that you are paying. That could be money that goes toward your principal balance. Even an extra $5 or $10 per month can make a difference in what you end up paying in interest.
We have to understand our money and where it goes in order to understand our money and where to put it.
I hope that this helps!