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If you have a daily simple interest (DSI) loan, the word “daily” indicates that interest is calculated every day. Thus, the amount you owe on a DSI loan increases with each passing day.

However, because DSI loans use a simple interest calculation, interest does not compound. It’s important to learn how to calculate daily simple interest so you know how much you will owe on a DSI loan.

Daily Simple Interest (DSI) Explained

When you take out a loan, you likely expect to pay interest in addition to the original amount of the loan. However, the way interest is calculated is not the same for all loans.

With daily simple interest, only the remaining balance (principal) on the loan is used in the calculation. This is different from compound interest, where interest that accrues is added to the principal and thus included in subsequent interest calculations.

Because DSI loans calculate interest daily and only use the principal in the calculation, paying on time will help you pay off the loan more quickly than making late payments. Paying early will be even more beneficial, as will paying more than the minimum.

How to Calculate Daily Simple Interest

If you take out a loan with daily simple interest, it means interest will be calculated every day on the loan. In addition, interest is only calculated using the principal of the loan.

Simple interest is calculated as:

I = P * R * T

And:

P = Principal
R = Daily interest rate
T = Time between payments

The last part of the formula, T, is the time between payments. That refers to the amount of time that interest has been accruing. For example, if you pay interest every month, then 30 days may have passed since your last payment. Thus, we multiply the daily interest by 30 and then multiply that rate by the principal to determine how much interest you owe.

What Happens if I Don’t Pay the Daily Simple Interest on My Personal Loan?

If you pay the daily simple interest on your personal loan late, more of the payment will go toward interest, and less of it will go toward reducing the remaining balance. This is because more time has passed, and the loan has accrued more interest than it would have if you had paid on time.

For example, suppose you have a $3,000 loan with a 5% annual simple interest rate, calculated daily. On this loan, you would have $12.33 of interest after 30 days. If you pay $75 toward that loan, you pay the $12.33 interest and reduce the principal by $62.67. But suppose you wait 60 days to pay instead. Interest is still accruing on the original $3,000 principal, so you now owe $24.66 in interest. Now, your $75 payment only reduces the principal by $50.34.

Recommended: Is There a Grace Period for Personal Loans?

Comparing Daily Simple Interest vs Fixed Interest

Daily simple interest and fixed interest are not mutually exclusive. In fact, DSI loans are usually fixed-rate loans. In other words, the interest rate does not change for the life of the loan. This is common with auto loans and short-term personal loans.

One difference you might see is with mortgages. These loans are usually calculated monthly instead of daily. As a result, paying a few days early won’t reduce how much interest you owe. That said, paying more than the minimum on the mortgage can reduce how much you owe overall.

Comparing Daily Simple Interest vs Variable Interest

DSI loans are usually fixed-rate loans, so your payments won’t change for the life of the loan. Variable interest loans, however, have a rate that fluctuates according to market rates. Monthly payments fluctuate along with the rate, so it may be hard to predict how much you’ll have to pay every month.

Nevertheless, interest rates can be lower on variable-rate loans, especially at the beginning of the loan term. Variable-rate loans are common with mortgages, which again means interest is often calculated monthly instead of daily.

How Do Daily Simple Interest Loans Work?

With DSI loans, you generally make monthly payments. Some of each payment goes toward interest and the rest reduces the principal. The only thing that makes DSI loans somewhat complicated is the fact that their interest is calculated every day. However, this daily calculation also means early payments can help reduce the total amount you pay on a DSI loan.

For example, suppose you take out a $5,000 personal loan with a 36-month term and 12% annual simple interest, calculated daily. We will also assume your monthly payment is $120. If you make your first payment after 30 days, $49.32 goes toward interest, and $70.68 goes toward the principal. However, if you instead make your first payment after 15 days, only $24.66 goes toward interest, and $95.34 goes toward the principal.

Increasing how much you pay also helps you reduce the principal on a DSI loan more quickly. Using the above example, if you paid $240 instead of $120, the interest owed would be the same after both 30 days and 15 days. In other words, all of that extra $120 would go toward reducing the loan’s principal.

Pros and Cons of Daily Simple Interest Loans

Daily simple interest loans can be beneficial for some borrowers, but they aren’t without their downsides.

Pros of Daily Simple Interest Loans

•  Interest does not compound — only the principal is used to calculate interest

•  Early payments can save you money on interest

•  Payments are usually the same amount every month

Cons of Daily Simple Interest Loans

•  Interest rates may be lower on variable-rate loans

•  Late payments mean interest keeps accruing

Pros	Cons
No compound interest	Late payments lead to more interest
Early payments can reduce interest paid	Rates can be higher than variable-rate loans
Consistent monthly payments

Examples of Daily Simple Interest Loans

Two of the most common daily simple interest loans are auto loans and personal loans.

Auto Loans

When you finance a new vehicle, the interest on that loan is often calculated using daily simple interest. For example, suppose you have a $25,000 auto loan with 6% interest and a six-year term.

On this loan, your interest for the first 30 days would be $123.29. If you paid $500 after 30 days, $376.71 goes toward the principal, bringing it to $24,623.29. After 30 more days then, the interest charge is $121.43, leading to a slightly higher principal reduction of $378.57. With each monthly payment, you reduce the principal more.

Personal Loans

Personal loans can be used for a variety of needs; two personal loan examples are covering unex pected medical bills and paying for urgent home repairs.

While there are different types of personal loan, they often use daily simple interest. For example, if you take out a $5,000 personal loan with daily simple interest and don’t make a payment for 30 days, the loan will accrue interest for each of those 30 days. However, the principal after 30 days will still be $5,000.

On the other hand, if you made a $250 payment after 15 days, your principal would be reduced to $4,750. Then, interest would be calculated using $4,750 as the principal for the remaining 15 days that month. Hence, you would immediately reduce how much interest the loan accrues each day.

Recommended: Getting Approved for a Personal Loan

More Personal Loan Tips From SoFi:

With a daily simple interest (DSI) loan, interest accrues daily but doesn’t compound. Early payments lead to less interest owed, while late payments increase your interest. DSI personal loans can seem expensive, but they’re a better alternative to more expensive forms of borrowing, such as credit cards.

SoFi Personal Loans have a low fixed interest rate, and loans are available from $5K all the way up to $100K. You can use them for whatever you want: home projects, credit card consolidation, even unplanned events.

SoFi Personal Loans are “good debt,” available whenever and wherever the need arises.

FAQ

How do you calculate daily simple interest?

You calculate daily simple interest by multiplying the principal, the daily interest rate, and the number of days since your last payment. This formula is expressed as I = P*R*T.

Is simple interest charged daily?

Simple interest does not have to be charged daily; it can also be charged monthly or annually. However, daily simple interest is always charged daily.

How does a daily interest rate work?

Daily interest is simply a fraction of the annual interest rate. For example, on a non-leap year, the daily interest on a 15% daily simple interest loan would be 15%/365 = 0.041%. Thus, 0.041% is the amount of interest charged per day.

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The vast majority of dividends are considered ordinary dividends, but some are qualified dividends and the tax treatment is different for each.

While sorting out which type of dividend you have can be confusing, it’s important to know the difference as they are taxed at different rates: Qualified dividends are taxed at the preferential capital gains rate, while ordinary dividends are taxed as income.

How Are Dividends Paid?

Typically, dividends are paid in cash, and they’re sent by the company directly to your brokerage, which will deposit the money into your account. Or many companies mail checks directly to investors who own shares in their firms.

Alternatively, you might get dividends as additional shares of stock. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares with your dividend payment. This has the advantage of both simplifying the process (since you won’t have to receive the cash and then buy more shares yourself), and potentially being less expensive, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs offer the ability to buy additional shares at a discount.

Less commonly, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company or physical assets the company owns.

Recommended: Capital Gains Tax Guide

What Is a Qualified Dividend?

Certain dividends from holding shares of stock in domestic companies and some foreign companies — and which an investor has held for a minimum period of time — are qualified dividends.

Qualified dividends are taxed at a lower rate than ordinary dividends. They’re taxed at the long-term capital gains rate, which ranges from 0% to 20%. Most people won’t pay more than 15% on qualified dividends. As such, investors typically prefer to receive qualified dividends, but they’re the less common kind of dividend paid out.

Qualified dividends must meet certain requirements:

•   The dividend must be paid by a U.S. company or a qualified foreign corporation.

•   The dividend must not be of the type that does not qualify.

•   If you hold common stock, you must have held the shares for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. (That’s the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend.)

•   If you hold preferred stock, you must have held the shares for more than 90 days during the 181-day period starting 90 days before the ex-dividend date.

•   A mutual fund must have held the investment unhedged for more than 60 days during the 121-day period starting 60 days before the ex-dividend date, and investors must have held their shares of the mutual fund for the same period.

How to Figure Out If You Have a Qualified Dividend

For investors about to count the number of days they’ve held a stock, be sure to include the day they sold the stock, but do not include the day they bought it.

Here is an example:

Imagine you bought 1,000 shares of ABC Company common stock on July 2, 2021, and you sold the 1,000 shares on August 11, 2021. ABC Company paid a cash dividend of 25 cents per share with an ex-dividend date of July 15, 2021.

Your Form 1099-DIV from the company shows $250 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you only held shares of ABC Company for 40 days of the 121-day period that began 60 days before the ex-dividend date, so you have no qualified dividends from ABC Company.


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What Is an Ordinary Dividend?

Once you understand qualified dividends, it’s easy to spot the difference between ordinary dividend vs. qualified dividend: Any dividend that isn’t a qualified dividend is considered an ordinary dividend — and that’s most of them.

In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time. (Qualified dividends are reported in box 1b on IRS Form 1099-DIV, while ordinary dividends are reported in box 1a.)

Certain kinds of dividends are not qualified dividends even if they’re reported in box 1b of your Form 1099-DIV, according to the IRS. The following dividends are on this list:

•   Capital gains distributions

•   Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions

•   Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year

•   Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation

•   Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property

•   Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends

•   Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends

Ordinary dividends must be reported on IRS Form 1040, line 3b, and they are taxed at ordinary income rates, which range from 10% to 37%.


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How Qualified and Ordinary Dividends are Reported at Tax Time

Generally, an investor will receive a Form 1099-DIV — “Dividends and Distributions” — from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year.

Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.

On Form 1099-DIV, dividends are reported as follows:

•   Box 1a: Ordinary dividends, representing the total dividends paid to you during that tax year

•   Box 1b: Qualified dividends, and this will be the portion of total dividends that qualify for the lower tax rate

•   Box 3: Non-dividend distributions, which are a nontaxable return of capital

If you have had taxes withheld from your dividends, this will be reported in box 4.7.

The Takeaway

Understanding qualified versus ordinary dividends can help investors make decisions about what account to hold their dividend-paying investments in: Inside a retirement account, such as an IRA, an investor will owe no taxes on dividend income, but they’ll often pay ordinary income taxes on all withdrawals.

Outside a retirement account, an investor will pay lower rates on qualified dividends, and may be able to use dividends to supplement other income or to reinvest in their portfolio.

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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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