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# Calculating Interest

Our most frequent inquiries often center around the topic of calculating interest. This page was designed to answer a few of those questions and help our clients understand how payments will be applied to their loan. As always, please feel free to give us a call for further explanation.
There are several ways to calculate interest but only two that we commonly use to service loans. Interest can be computed by assuming a fixed period of time between payments, usually called monthly or 30 day interest. It can also be computed based on actual time, often called daily interest. At INCS we feel that using daily interest is more accurate and fair to both the payors and the payees. Therefore, INCS will service all new and transferred accounts using the daily interest method unless otherwise specified in the initial instructions or in the Note.

### Calculating Daily Interest:

Interest is simply the rent you pay for using someone else’s money. The rent is based on the rental (interest) rate, how much money you’ve been using (the current principal balance), and how long you’ve been using the money (the time between payments). Since your interest charge is based on the actual number of days between payments, fewer days result in less interest due. This is to the benefit of the payor as it means more of the payment amount is applied to principal. The more the loan balance is reduced today, the less interest paid in the future. Conversely, more time between payments results in a higher interest charge. If the payment isn’t enough to cover the interest due no principal reduction takes place leaving unpaid interest carried forward to the next payment. This is a benefit to the payee as it means more interest will be due before principal credit is applied. The interest amount due will change every month based on your payment receipt date. In order to calculate how much interest will be due, you can use this simple formula. Multiply your current principal balance by the interest rate (as a decimal) and divide the answer by 365. The result is the interest amount due for one day. Next count the days between the current interest paid to date and the receipt date of the next payment. Multiply the daily interest amount by the number of days to get the total interest due for the month. Example: Jones pays Smith

• Principal Balance \$180,000.00
• Interest Rate 7.5%
• Interest currently paid through 1/5/15
• Payment received 2/3/15
• Payment amount \$1500.00

\$180,000.00 x .075 = \$13,500.00 / 365 = \$36.986301 x 29 = \$1072.60 (after rounding)   Principal x int rate = yearly int / days in year = int owed daily x days between payments = interest due for month. Using the scenario above the 2/3/13 payment will be applied as follows: \$1072.60 as interest and \$427.40 as principal. Something to Note… When a loan is calculated on daily interest, you cannot prepay interest. Interest is calculated through the date of payment but it will not be applied past that date. Therefore, if several installment payments are received at one time, your payment due date will be advanced but interest will still only be paid through the date of payment. In this case, more principal credit will be applied initially, leaving the lagging interest, on a new lower balance. This interest will be paid first when regular interval payments resume. Although more will go to interest with the next payments, remember that you received a much larger principal reduction up front. It does work itself out over time.

### Monthly Interest

Interest can be calculated using actual days, called daily interest or on a fixed period of time, such as it is with monthly interest or 360. With this method of calculation, a year is broken into 12 equal months and interest is due according to a 30 day cycle. Meaning, only 360 days of interest are collected in a year, rather than the usual 365. Since the monthly interest amount is always based on 30 days, it is not affected if a payment is received before the due date or after, there will still be a set amount applied to interest. The only factor that will change your monthly interest amount is your principal balance. As your balance declines, your monthly interest amount will decline. In order to calculate how much, of your next payment will go to interest, you can use this simple formula. Multiply your current principal balance by the interest rate (as a decimal) and divide the answer by twelve to give you the amount of interest due for one month.

• Principal Balance \$180,000.00
• Interest Rate 7.5%
• Interest currently paid through 1/3/15
• Payment due 2/3/15
• Payment amount \$1500.00

\$180,000.00 x .075 = \$13,500.00 / 12 = \$1125.00 Principal x int rate = yearly int / months in a year = int owed for 30 days Using the scenario above the 2/3/15 payment will be applied as follows: \$1125.00 as interest through 2/3/15 and \$375.00 as principal. The payment could be received 2/3 or 2/28, using this method the receipt date has no bearing on the interest amount applied. Monthly interest means that interest will always be applied from a fixed date to the same date the following month. It will be presumed that each payment is 30 days apart even if payments are received prior or after the due date. Using our above example, even if this borrower were to become several months delinquent, they would still receive the same principal and interest credit when they do make their next payment, whenever that may be. INCs will collect all new and transferred accounts on daily 365 interest unless otherwise specified when the account is established. If you have any questions regarding monthly interest and how payments are applied please feel free to give us a call.