Establishing Financial Stewardship and Financial Ethics Through Simple Interest
Simple interest is a financial model that has a predictable cost over time. It emphasizes the inherent value of time and money invested in a particular item, like a car or business loan. Unlike compound interest, which multiplies debt through repeated accrual, simple interest is consistent.
Predictability is essential for effective planning and budgeting. Businesses and regular shoppers can shop and borrow better while achieving goals when shopping for the right loan. However, without proper understanding, people are at higher risk of investing more money into simple interest than the actual goal itself.
Time is a Valuable Resource
At its core, simple interest empowers businesses to organize their shopping, planning, and budgeting more effectively. Philosophically, simple interest loans teach a person the importance of time and proper investment. When respected and managed wisely, the duration of one’s borrowing can be reduced. For example:
Partial frequent payments help keep past due accounts current, depending on the initial due date, and pay down building interest in between payments.
Based on the quoted interest rate, loan term, and principal, some loans will take longer to pay off. If the interest rate is over 15-17%, then refinance the loan or consider partial consistent payments. The goal is to offset the building interest in between regular monthly payments.
On the surface, lump sum payments are great. However, with a simple interest loan, the borrowers will build interest in between payments. That means without making regular payments, the borrower is at risk that their next payment will go straight towards interest than the principal itself. This can cause people to pay longer than anticipated (according to their contract).
Promoting Financial Ethics in Borrowing and Lending
Simple interest practice ethical financial relationships between the borrower and the lender. The structure avoids unpredictable compounding debt while delivering a straightforward design where the cost of borrowing remains directly tied to the original principal. Meaning, nothing changes for the borrower.
Adhering to the terms and conditions of a simple interest loan reflects integrity and commitment. This can also boost the borrower’s score (not associated with one’s credit score) depending on the lender, which unlocks exclusive deals and refinancing options. As long as the borrower pays on time, the lender can make adjustments or propose refinancing options (depending on the initial contract and the company themselves).
Using Simple Interest as a Reliable Business Tool
Simple interest loans are great for progression and rebuilding a borrower’s financial portfolio. Because of their simple terms, businesses can invest more into the loan itself with clear and fixed repayment obligations. For example, a small business might use a simple interest loan to invest in upgraded equipment or expand operations.
The loan terms allow businesses channel its efforts into driving productivity rather than managing confusing financial burdens and further complications. For example, if making a late payment on a simple interest loan, the borrower can easily calculate a rough estimate of how much of their payment will go towards principal.
Final Thoughts?
Simple interest loans are simple, if done correctly. Anything under 17% APR is better than over it. For example, if a Harley-Davidson 2015 CVO’s principal is $36,700 (P), the daily interest rate is 25% (I), and the regular monthly payments are $300, then the person is:
Paying $25.14 per day (P/365 [the calendar days] * I)
In a regular billing cycle, everything depends on time and the amount invested towards a high simple interest loan.
Joe was 5 days late from his due date. The last time he made a payment was 35 days ago (30 regular billing cycle days + the additional 5 days of being past due). Depending on the amount he paid last time may offset the accrued $879.90 (35 days * $25.14/day) of daily interest since the last time he made a payment on his account.
The best way to avoid paying more money towards interest than the principal is to consider doing partial frequent payments $50-150 every other week or refinance the bike.
Refinancing a loan means the borrower starts over through another lender. This can include another potential credit hit, down payment, or increase in monthly payment or simple interest. However, refinancing isn’t a bad option if the competitive lender provides a better financial option compared to the current one.
Partial frequent payments help pay down the interest and improves customer credit score with the current lender. While the customer credit score is NOT tied to the customer’s personal credit score, this can help increase trading in options or additional hardship assistance (if needed).
It’s not the best of the best loan for borrowers, but it is a great way to establish personal and business credit, a relationship with the initial lender, and learn the true meaning behind where the money goes when the due date arrives.
Author’s Note
Hey! Here’s a fun fact about this post and the knowledge behind it.
During the day, I work as a full-time financial specialist. We specialize in breaking down simple interest loans and collecting payments via inbound and outbound calls. While I hate getting cussed out for no reason, I find a lot of joy in teaching people about where their money goes when it is time to make a payment on the account.
This advice I provided is for educational purposes only. I’m not a certified anything (except a smarty pants with creative sailor language). It took some time writing this out, but I feel more people should appreciate simple interest loans more than compound loans.
Before I go, if you know or see anything here, I should correct, please let me know. The most challenging part for me was breaking down the estimated value of daily interest one would accrue in between payments, especially if they’re past due.
In a nutshell, anyone with 20%+ simple interest rate loans should look into refinancing or prepare themselves to be upsidedown while making their first 12-36 payments.