Simple Interest Calculation Methods: Overview

With Simple Interest, the interest amount is calculated only on the initial principal balance.

The formula for simple interest is:

$I=Prt$

Where:

• $I$ = Interest
• $P$ = Principal loan amount
• $r$ = interest rate (as a decimal)
• $t$ = period of time

The spreadsheet formula for calculating the installment is PMT(Rate; NPer; PV; FV), where:

• Rate = annual interest rate / 12 (for monthly payments)
• NPer = Number of Periods (total number of months)
• PV = Present Value (the principal loan amount)
• FV = Future Value (typically 0 for a loan that will be paid off)

Additional Setups

Financial Ledgers

You can choose to use the same ledgers as those used by other Simple Interest Calculation Methods.

If not, you'll need to add two Interest Sub-Ledgers under the main interest control account: one for Interest Received and one for Interest Reversed. Alternatively, you can use just one ledger if preferred.

Financial Events

You must add three new Events specifically for Simple Interest Loan Products:

• In Default Interest Charged:
  • Event Attribute: In Default Interest Charged
  • Debit (Dr): Client Control
  • Credit (Cr): Interest Received or In Default Interest Received (depending on your ledger setup)
• In Default Interest Adjustment:
  • Event Attribute: In Default Interest Adjustment
  • Debit (Dr): Client Control
  • Credit (Cr): Interest Received or In Default Interest Received (depending on your ledger setup)
• In Default Interest Reversal:
  • Event Attribute: In Default Interest Reversal
  • Debit (Dr): Interest Reversed or In Default Interest Reversed (depending on your ledger setup)
  • Credit (Cr): Client Control

When setting up a new Loan Product with the Simple Interest Calculation Method, you are required to set up a corresponding Loan Agreement document for that product.