If the Interest Calculation Method is set to "1 – 365/365", monthly interest for the P/I Constant is calculated as follows:

Principal Balance amount as of last payment X Interest Rate ÷ 365 X days difference from last Due Date to current Due Date = the amount of payment that goes towards interest. The rest of the P/I Constant, after paying interest, goes to principal.

Example:

P/I Constant is $200.

Principal Balance as of last payment date = $25,000

Interest Rate = 5.75%

Last Due Date to this Due Date = 31 days

Interest Calculation Method = 1 – 365/365 (or 101 - 365/365)

Interest calculation:

25,000 X .0575 ÷ 365 X 31 = $122.09 This is the amount of interest paid from the P/I Constant.

200.00 – 122.09 = $77.91 This is the amount applied to principal from the P/I Constant.

Code 2 and 102 considers every month as having 30 days. February and all the months with 31 days are considered 30-day months.

Principal Balance X Interest Rate ÷ 360 X 30 = Interest amount of payment

Example:

P/I Constant is $200.

Principal Balance as of last payment date = $25,000

Due Date to Due Date = 31 (but the calculation will use 30)

Interest Rate = 5.75%

Interest calculation:

25,000 X .0575 ÷ 360 X 30 = $119.79 This is the amount of interest paid from the P/I Constant.

200.00 – 119.79 = $80.21 This is the amount applied to principal from the P/I Constant.

When using Code 3 or 103, the annual interest rate is divided by 360 to get the daily interest rate, and then multiplied by the number of days from last Due Date to current Due Date.

Principal Balance X Interest Rate ÷ 360 X days difference from last Due Date to current Due Date = Interest amount

Example:

P/I Constant is $200.

Principal Balance as of last payment date = $25,000

Interest Rate = 5.75%

Due Date to current Due Date = 31 days

Interest calculation:

25,000 X .0575 ÷ 360 X 31 = 123.78 This is the amount of interest paid from the P/I Constant.

200.00 – 123.78 = $76.22 This is the amount applied to principal from the P/I Constant.

Simply put, Code 4 and 104 is like a 365-day simple daily calculation (Code 1 and 101) but looks like a 360-day calculation (Code 2 and 102) where each month has 30 days. Like Code 1, this method calculates interest accruals every day using a daily per diem interest amount.

Principal Balance X Interest Rate ÷ 365 X 30 (because every month is considered 30 days) = Interest

Example:

P/I Constant is $200.

Principal Balance as of last payment date = $25,000

Interest Rate = 5.75%

Every month is considered 30 days of interest (even though Due Date to Due Date is 31)

Interest calculation:

25,000 X .0575 ÷ 365 X 30 = 118.15 This is the amount of interest paid from the P/I Constant.

200.00 – 118.15 = $81.85 This is the amount applied to principal from the P/I Constant.

Code 5 and 105 is like a 365-day simple daily calculation (Code 1 and 101) but it also considers leap years. So, when there is a leap year, it calculates using 366, and when there isn’t a leap year, it calculates using 365.

Principal Balance X Interest Rate ÷ 366 (if leap year/365 if non-leap year) X number of days from Due Date to Due Date = Interest

Example:

P/I Constant is $200.

Principal Balance as of last payment date = $25,000

Interest Rate = 5.75%

Last Due Date is 02/15/2020 and next Due Date is 03/15/2020 (a leap year) = 29 days

Interest calculation:

25,000 X .0575 ÷ 366 X 29 = 113.90 This is the amount of interest paid from the P/I Constant.

200.00 – 113.90 = $86.10 This is the amount applied to principal from the P/I Constant.

Here’s a cool little trick that will bring home the differences in interest calculation in a more illustrious way.

1.Go to the Loans > Account Information > Amortization Schedule screen. Remember that this screen is more just for testing out how changing certain aspects of a loan will affect the loan. It doesn’t actually change the loan.

2.When you are on that screen, try changing the Interest Calculation Method to another method, then  click <Create Schedule>.

3.Click on the Amortization Schedule tab and view the interest calculated each month. Right-click and print out the schedule for comparison.

4.Go back to the Account Information tab and change the Interest Calculation Method to a different one, then click <Create Schedule> again.

5.View the Amortization Schedule tab and print out that schedule.

6.Compare the differences in monthly interest.

Loans > Account Information > Amortization Schedule Screen (click to expand)

Loans > Account Information > Amortization Schedule Screen > Amortization Schedule Tab (click to expand)