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When it comes to borrowing money, people want to ensure they’re getting the best deal possible. No matter what they need the money for, opting for a simple interest loan means they should only ever pay back the amount they initially agreed to.
Firstly it’s important to define what interest is. Interest is essentially the fee an individual pays for borrowing money.
When someone asks a lender for a loan, they say how much they would like to borrow and over what time frame. The lender then comes back and may agree to lend the borrower $x amount over a term of x months, at a rate of x% interest. The interest rate is the charge the lender adds on for providing the borrower with the original loan amount.
There are actually two different ways lenders can calculate interest when it comes to borrowing money – Simple Interest and Compound interest.
Simple Interest
With a simple interest loan, the amount a person borrows (the principal) and the interest rate don’t change over time; they’re fixed. When they take out a simple loan, the lender should be able to tell them at the time of signing the agreement exactly how much they will end up paying back in total to them over the period of the loan term, assuming all payments are paid on time.
Compound Interest
Compound interest is where interest is charged not only on the principal amount but also on the previous month’s interest paid. This means that with loans and credit cards that use compounding interest, the balance of the principal amount they borrowed will grow over time as they are being charged interest on the previous month’s interest charges.
The longer it takes someone to pay off the debt, the larger the amount they owe grows – this often ends up putting people into a perpetual cycle of debt.
If a person is stuck in a debt cycle or spiral caused by difficult to manage compound interest charges on a credit card or loan, it can sometimes be hard to see how to get out.
Using a simple interest loan to consolidate these debts is an easy and effective way to regain control of their finances.
A simple interest loan will provide a borrower with a lump sum amount to pay off these debts they pay back in fixed and affordable installments each month. When they sign an agreement for a simple interest loan, they know exactly how many months they will need to pay towards the balance to clear the amount in full.
If someone wants to avoid paying interest on interest on any borrowing, they should consider taking out a simple interest loan.
Simple interest loans only calculate interest on the principal balance, making it so they have a natural endpoint where the loan is paid back in full. As long as repayments are made on time each month, borrowers should never have to pay back more than they originally agreed to.
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