Buying Example Disclaimer. This example illustrates one application of the method. The results shown here and the results in your situation may differ. These differences occur for three reasons: (1) Laws vary from state to state, (2) the computer programs used by lenders differ, and (3) the contracts used by lenders differ. In the example, the monthly interest is calculated as 1/12 of the annual interest. Your finance agreement, even if it uses this method, may not work like the one in this example. The example addresses the rebating of interest only, not any other charges that may be included in the loan.

The Daily Simple Interest method is similar to the Simple Interest method except that interest is calculated on the actual balance each day. Payments are credited and the loan balance is reduced on the day the payment is received, rather than on the due date, as is done under the Simple Interest method. Daily Simple Interest loans have the same advantage as the Simple Interest loans by allowing principal amounts to be prepaid during the loan, thereby reducing the outstanding balance and the interest portion of subsequent payments if all subsequent payments are made on the due date. The term of the loan and total interest are reduced when additional principal payments are made if all subsequent payments are made on the due date. However, if the payments are made a few days after the due date each month, the interest paid will be higher than under the Simple Interest method (and higher than under the Constant Yield (Actuarial) method if no prepayments of principal are made).

Amount financed	$18,800.00
Term	48 months
APR	9.00%
Monthly payment	$467.84

Assuming that each payment is made exactly on its due date:

First payment interest	=	$18,800 × 9% ÷ 12	=	$141.00
First payment principal	=	$467.84 – $141.00	=	$326.84
End of month 1 net loan balance	=	$18,800.00 – $326.84	=	$18,473.16
Second payment interest	=	$18,473.16 × 9% ÷ 12	=	$138.55
Second payment principal	=	$467.84 – $138.55	=	$329.29
End of month 2 net loan balance	=	$18,473.16 – $329.29	=	$18,143.87
Full-term interest if each payment is made on the due date	=	($467.84 × 48) – $18,800	=	$3,656.32

If an additional $1,000 principal is paid at the end of the first month, the loan balance is reduced from $18,473.16 to $17,473.16. Month 2 interest charges will be based on this reduced balance, so more principal will be credited from each payment if all subsequent payments are made on the due date. If the remaining payments are made on time, the loan will be repaid in 45 months rather than 48 months because of the extra $1,000 principal payment in month 1. The total interest paid will be $3,224.84 instead of $3,656.32, a savings of $431.48 in interest. However, if no extra principal is paid and every payment is made 5 days after the due date, the total additional interest paid will be $30.38. The early termination balance at month 24 will be $27.91 higher than under the Simple Interest or Constant Yield (Actuarial) method but $26.90 less than under the Rule of 78 method.