How To Use Simple Interest

When an investor lends money to a borrower, the borrower must pay back the money originally borrowed and also the fee charged for the use of the money, called Interest. From the investor's point of view, interest is income from invested capital. The capital originally invested is called the Principal.

At Simple Interest, the interest is computed during the whole time, or Term, of the loan, at the stated Annual rate of interest. This interest is computed on the Original Principal until a payment is made, or on Remaining Principal after a payment is made.

This is expressed as follows:

I = Prt (i.e. P x r x t)

I = Simple Interest
P = Principal
r = Annual rate of interest
t = Time in years

Time can be expressed in days, based on either a 360 day year which is called Ordinary simple interest or a 365 day year (leap year or not) which is called Exact simple interest.

Time Between Dates

Exact time is the exact number of days between two dates including all days except the first. This is the calculation that Collect! uses for Simple Interest calculations.

Methods

There are two possible ways to use the information above for computing Simple Interest in Collect!

1. Ordinary interest and Exact time (360 day year, exact number of days) This is the Banker's Rule. It usually yields the maximum interest.

2. Exact interest and Exact time (365 day year, exact number of days)

Calculations

Simple interest is calculated by multiplying the Principal by a given Interest Rate. The interest amount is not added to the Principal. However, it is added to the debtor's Owing. When a payment is made on the Principal, Interest from then on is calculated on the what is left of the Principal amount. Any time a Principal payment is made, Interest is calculated on the new remaining amount.

Interest accumulates and is added to the debtor's Owing. However, unlike Compound Interest, the Principal amount is not affected by the Interest amount when you use the Simple Interest method.

Calculating Accrued Simple Interest

Accrued Interest =

Principal x Days x (Interest Rate / 100)
----------------------------------------------------(divided by)
360, 364 or 365 days

Debtor Payments

When a debtor makes a payment, the amount is applied to reduce outstanding Interest amounts first. Any remainder is applied to reducing the Principal. From then on, interest is calculated on the Remaining Principal.

If you use a Payment Breakdown type transaction, you can apply the payment to outstanding fees, interest and principal using the order that suits your needs.

Using The Interest Detail Form

The Original Principal from the Debtor form is displayed in the Interest Detail form. The Operator chooses a 360, 364 or 365 day computing period and enters an Annual Interest Rate. Collect! performs the necessary calculations.

Accrued and Total Interest amounts display. Accrued Interest is outstanding. When a payment is made, it is first applied to reduce the Accrued Interest. The Debtor form always displays the Total Interest accumulated during the time of the debt.

Interest calculations can be reset if there is a Judgement or change in interest rate. Press the Reset Interest button.