This specific interest calculation method uses a 365-day year for calculating interest, but assumes a 360-day year for determining the daily interest rate. For example, a $10,000 loan with a 10% annual interest rate, calculated using this method, would accrue approximately $2.78 in interest daily ($10,000 * 0.10 / 360). This daily rate is then multiplied by the actual number of days in the loan term (365 or 366 in a leap year) to calculate the total interest due.
The application of this method results in slightly higher interest payments for borrowers compared to methods utilizing a 365-day year for both calculations. Historically, this method simplified calculations before widespread computing power. Today, while less common for mortgages, its use persists in some commercial loans and short-term financing agreements. Understanding the underlying calculation method is crucial for borrowers to accurately assess loan costs and compare loan offers effectively.
