What is simple interest on a personal loan and how is it calculated?

Simple interest formula: Interest for a period = Principal x Annual Rate x (Days in period / 365). For a $10,000 loan at 12% APR, monthly interest is approximately $10,000 x 0.12 / 12 = $100 in month 1. After the first payment reduces the principal, month 2 interest is slightly less (say $95), and so on.

Amortization: Personal loans are 'fully amortizing' - each fixed monthly payment is calculated so that the final payment brings the balance to exactly zero. In early months, most of the payment is interest (because the balance is high). In later months, most goes to principal (because the balance is low). This is the amortization curve.

Why simple interest matters for extra payments: Because interest is calculated on the current balance, any extra payment you make immediately reduces the principal, which reduces the interest for the next period. A $200 extra payment on a $10,000 loan at 12% saves approximately $24/year in future interest (0.12 x $200) - small per payment but compounding over the remaining loan term.

Compound interest comparison: Credit cards typically use compound interest - unpaid interest is added to the balance and itself earns interest ('interest on interest'). Personal loans do not work this way. Your interest charges are always calculated on actual principal remaining, never on accumulated interest. This is why personal loan total interest is predictable and fixed at origination.

Early payoff calculation: If you want to pay off your personal loan early, ask the lender for a payoff quote (the exact amount including accrued interest to a specific date). Since interest accrues daily, the payoff amount changes every day. A payoff quote is typically valid for 10-30 days.