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Simple Interest 101

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Learn how Simple Interest works Calculate Simple Interest Communicate Simple Interest concepts to customers Objectives

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Common Misconceptions Customer gets charged daily interest only when they are delinquent. If the daily interest is $10.30, that is $10.30 of extra interest each day they are late. Customer has 10 days before they accrue interest. Customer has a daily interest of $24.99 when the interest rate is 24.99%.

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Overview Let’s watch…

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What is Simple Interest? Simple Interest is a method of calculating interest. Under the Simple Interest method, interest accrues daily and assumes payments will be made on the scheduled due date. The amount of interest accrued daily may vary based on the amount of the principal balance and the number of days between payments.

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When payments are made early, more frequently or for greater amounts, more of the payment will be applied to principal and less interest will accrue so less interest is paid over the life of the loan. How does it work?

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Simple Interest loans may take longer to pay off if customers make their payments late or receive deferments or modifications. Interest will continue to accrue during a deferment or modification, which means the customer will pay more in interest resulting in a balance remaining at the end of the term. How does it work?

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Calculating Daily Interest Principal $18,000 Rate 13% Time 365 days $18,000 x.13 / 365 = $6.41 Multiply and Divide In the example above, the Daily Interest on this account is $6.41 based on the current principal balance of $18,000.

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Calculating 30 days of interest Now that we know the Daily Interest is $6.41, we need to calculate the amount of interest that would accrue in the first 30 days of the loan. $6.41 x 30 = $192.30

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What happens when a payment is made? If the customer makes a $500 payment 30 days into the loan, how much will apply to interest and how much will apply to principal? $6.41 x 30 = $ to interest $500 - $ = $ to principal The new principal balance is… $17,692.30

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What happens when a payment is made? The new principal balance is $17, We now need to calculate the new Daily Interest accrual. $17, x.13 / 365 = ??? The new Daily Interest is… $6.30

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Lets try it… Helen is looking for a car. She notices that her local credit union has loans with a 10% interest rate. How much would Helen’s Daily Interest be based on an original principal balance of $12,500? $12,500 x.10 / 365 = $3.42 How much interest would Helen accrue in the first 30 days of her loan? $3.42 x 30 = $102.60

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Let’s try it with a payment Helen made a $400 payment 30 days after the purchase of her vehicle. How much went to interest and how much went to principal? $3.42 x 30 = $ to interest $400 - $ = $ to principal What is Helen’s new principal balance? How much is Helen’s new Daily Interest accrual? $12, x.10 / 365 = $3.34

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Let’s try it with a payment Helen made a $400 payment 45 days after the purchase of her vehicle. How much went to interest and how much went to principal? $3.42 x 45 = $ to interest $400 - $ = $ to principal Helen’s new principal balance is $12, How much is Helen’s new Daily Interest accrual? $12, x.10 / 365 = $3.36

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Let’s try it with a payment Helen made a $400 payment 60 days after the purchase of her vehicle. How much went to interest and how much went to principal? $3.42 x 60 = $ to interest $400 - $ = $ to principal Helen’s new principal balance is $12, How much is Helen’s new Daily Interest accrual? $12, x.10 / 365 = $3.37

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Original Daily Interest Rate (DIR) = $3.42 If payment received after 30 days, new DIR = $3.34 If payment received after 45 days, new DIR = $3.36 If payment received after 60 days, new DIR = $3.37 Daily Interest Comparison

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This is not an exact science Throughout Helen’s loan, she had 4 deferments, a Due Date Change (DDC) for 29 days, and was over 30 days late 15 times. 4 DEFERS120 days 1 DDC29 days 15 over 30 DPD450 days TOTAL599 days

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This is not an exact science The Daily Interest accruing at the time of each occurrence will determine how much additional interest has accrued on the loan. With this type of history, it would take Helen longer to payoff her loan than it would if she had paid as agreed per the terms of the contract.

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Take a look…

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Transaction History Review

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Financial Tab Review

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Simple Interest and Payoff

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Start counting days from the last payment to the “good through” date on the payoff. In this case we are requesting the payoff on 9/24/12 which has a “good through” date of 10/08/12. This equals 47 days of interest that will accrue since the last payment.

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Simple Interest and Payoff Current Principal Balance$3, Daily Interest Since Last Payment$ Fees$ Total$3,186.24

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FAQ’s Why isn’t my balance going down? I have made X payments already. Interest accrues daily based on the current principal balance. When a loan is new, the principal balance is higher. Therefore, a greater amount of your payment goes to interest. As the loan matures more of your payment will be applied to your principal and bring your balance down faster with regular payments.

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FAQ’s I don’t see anywhere on my contract where it says I signed up for this. Where does it say this? This is located on the back of page one. Typically, this is found in the top left corner on line “A” or “1” describing daily interest accrual.

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FAQ’s I have a fixed interest rate, so how is it changing all the time? Your account has a fixed rate. Your rate is not changing. Your account accrues interest on a daily basis based on the current principal balance. This means as your principal balance gets lower, the amount of interest that accrues is reduced.

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FAQ’s If the contract term is 60 payments, why would the customer pay 68 months? The contract is 60 payments of “X” amount on “X” due date. This is assuming that all payments are made for their scheduled amount on their scheduled due date. Interest will continue to accrue if there are late payments, deferments, due date changes, or loan modifications on the account. This means more of the customer’s payment will be applied to interest and less to principal, which may extend the amount of time it takes to pay off an account.

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Best Practices DO! Advise the customer you are giving an estimated breakdown. Use the term Daily Interest when referring to the daily accrual of interest. Remain calm. If you get frustrated, the customer is likely to mirror that behavior. BE MORE!!!

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Best Practices DON’T! DO NOT use words like FEE or PENALTY. Simple Interest is neither. DO NOT use Simple Interest as leverage or a scare tactic to get a payment from a customer.

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Let’s practice… Check for understanding

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Review Learn how Simple Interest works Calculate Simple Interest Communicate Simple Interest concepts to customers

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Questions

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SCUSA Employee Development

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