Simple vs Amortize Interest | What's the Difference?

One thing you will notice about the blog is that I like to talk about the questions I get asked regularly. This is because of a couple of things: Velocity banking can be confusing, and I want to be sure you understand the intricacies when you start

  1. If there were excellent resources out there that explained this stuff, I probably wouldn't need to answer these questions all the time

  2. I want to have written accounts of the topics I discuss on YouTube, so I'm able to

A question I get near the top of my frequently asked questions list is:

"Denzel, is there a difference between simple interest and amortized interest?"

Well, the short answer is yes, but I've had conversations with people where they tried to tell me there was no difference. So what I'm going to do for you is layout definitions and examples of simple and amortized interest so you can see what I'm saying when I say there is a difference. Let's get into it.

Amortized interest is interest that is calculated on the principal amount of the loan each time you make a payment. So with an amortizing loan, each subsequent payment, you pay more towards principal and less towards interest. An example of an amortized loan would be a mortgage.

A simple interest loan, on the other hand, is all calculated on the principal amount when you are approved for the loan, so you always pay the same amount toward the interest and the principal every time you make a payment. Most auto loans are calculated with simple interest.

In the video below, I take the time to explain a couple of real-life examples of these different types of interest calculations.

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God bless,

Denzel

Denzel Rodriguez