The true cost of a simple-interest loan

Some loans are repaid in one sum at the end: a short-term note, a private loan from family, a single-payment business loan. For those loans there is no payment schedule to hide inside — how interest on a loan works is one multiplication, and the total interest paid is decided on the day you sign, by three numbers you already know. In this article I will price a $20,000 loan at three rates and three terms, show the daily meter running underneath the yearly figures, and point out the one lever that still works after you have signed: time. If your loan is this kind of loan, you can compute its entire cost on the back of an envelope — here is the envelope.

How interest on a loan works when nothing amortizes

On an installment loan the balance falls every month, so the interest shrinks with it. A single-sum loan makes no such concession: the whole principal stands outstanding from the first day to the last, and interest is charged on all of it, all the time. The charge is simple interest — the formula I = P × r × t — and underneath the yearly headline it accrues day by day. On $20,000 at 9%, the meter runs at $1,800 a year, which is $4.93 a day or $147.95 across a 30-day month. Two consequences follow, and both matter more than any fee schedule. First, the rate and the term multiply each other: double either one and you double the cost. Second, nothing about the cost is a surprise waiting at the end — it is arithmetic you can finish before you sign.

The total interest table: $20,000 at three rates and three terms

Here is the complete price list for that $20,000 single-sum loan. Each cell is the total interest paid over the term, with the total amount you hand back in brackets:

Total interest on a $20,000 single-sum loan at simple interest (total repaid in brackets). Every cell is principal × rate × years, computed for this article.

Two readings are worth taking from this grid. The first is the corner cell: at 12% over 5 years the interest comes to $12,000 — sixty cents of interest for every dollar borrowed, and a total repayment of $32,000 on a $20,000 loan. The second is the yardstick hiding inside the table: each $1,000 borrowed costs $90 a year at 9%, and $600 across five years at 12%. Scale any quote you are offered down to its per-$1,000 cost and loans of different sizes suddenly compare cleanly. Our interest calculator runs this same multiplication for your exact amount, rate and term, in simple or compound mode.

The one lever you still hold after signing: time

The amount and the rate are fixed by the note, but the third factor — time — stays partly yours, because interest on these loans stops the day the balance does. Repay the $20,000 loan at 9% at the end of year 3 instead of year 5 and the total interest paid falls from $9,000 to $5,400: a saving of $3,600, or $150 for every month you shave off. A partial repayment helps in proportion: pay $5,000 of principal back at the end of year 2 and the meter drops from $1,800 a year to $1,350 a year, because it now runs on the $15,000 that remains. Two cautions before you count those savings as yours. Some notes carry a prepayment penalty, and a single-sum loan concentrates all its risk in one payment — the calendar, not the arithmetic, is usually what defeats borrowers. Check the penalty clause first, and be honest about whether the repayment date is realistic.

Where this model stops

Most consumer loans are not built this way. A car loan, a mortgage or a standard personal loan amortizes: the balance falls with every payment, interest is charged on what is left, and the total cost comes out lower than the single-sum figures above for the same rate and term — which is precisely why lenders quote installment loans by their monthly payment. If your loan has monthly payments, its true cost lives in its schedule, and the honest way to read it is month by month: our amortization calculator lays that schedule out in full, and the loan EMI calculator prices the payment itself. Use this article’s model for what it is — the exact cost of loans where the balance stands still — and the schedule tools for loans where it does not.

Sources: the single-sum cost model follows the standard simple interest formulation (I = P × r × t) and Consumer Financial Protection Bureau (CFPB) guidance on single-payment and short-term loan costs. Every figure in this article was computed from that formula for this article; the rates used are illustrative, not market quotes, and prepayment terms vary by lender — check your own note.