What is a simple interest loan?
A simple interest loan charges interest only on the principal you still owe, never on interest that has already built up. Each payment covers that period’s interest first, then reduces your balance.
Updated October 30, 2026. Examples are calculated with the formulas shown on our formula page.
How a simple interest loan works
Take a $25,000 loan at 7% for five years. The payment is $495.03 a month. In month one, interest is $25,000 × 7% ÷ 12 = $145.83, so $349.20 of your payment reduces the balance to $24,650.80. In month two, interest is charged on that smaller balance. By the last year, almost all of each payment goes to principal.
Over the full five years you pay $4,701.80 in interest. Run your own numbers in the calculator.
Where you’ll find simple interest loans
- Auto loans: usually daily simple interest. See how daily interest works on car loans.
- Personal loans: fixed rate, fixed term, simple interest. What to compare.
- Mortgages: interest charged monthly on the remaining principal.
- Federal student loans: simple daily interest; unpaid interest can be added to principal in some situations.
Pros and cons for borrowers
Pros
- No interest on interest
- Extra payments cut total cost immediately
- Easy to understand and check
Cons
- With daily interest, paying late costs more
- Early payments are mostly interest
- The rate still matters more than the method
Frequently asked questions
What is a simple interest loan?
A loan where interest is calculated only on the principal balance, not on previously accrued interest. Most car loans, personal loans and fixed-rate mortgages in the US work this way.
Is a mortgage a simple interest loan?
A standard fixed-rate mortgage charges interest monthly on the remaining principal, so it behaves like a simple interest loan with monthly accrual. A few mortgages accrue interest daily; your note says which.
What is the difference between simple interest and precomputed interest?
With precomputed interest, the total interest is calculated upfront and built into the balance, so paying early saves less. With simple interest, interest depends on the balance over time, so paying early saves more.
Do late payments cost more on a simple interest loan?
On a daily simple interest loan, yes: interest keeps accruing every day, so a payment made late covers more interest and less principal, and you may also owe a late fee.