Whether you're shopping around for a simple interest promissory note or a discount promissory note, the calculation of interest remains the same. However, the two types of notes differ in how they handle interest. For a simple interest promissory note, you pay interest on the loan upon maturity. For a discount promissory note, you pay interest at the commencement of the loan by receiving a note discounted from its face value.

## Calculating Interest

## Step 1: Compute the Term Length

**Count the number of days between the issuance of the promissory note and its maturity** to calculate its term length**.** For example, if a note spans August 15 through November 13, there are 90 days in its term.

## Step 2: Calculate the Fraction of a Year

**Divide the number of days by 360** to convert the term into a fraction of a year. This fraction might be less than or greater than one year, depending on the term length. In the example, divide 90 by 360 to calculate 0.25 of one year.

#### Tip

Using 360 as the number of days is the **Banker's Rule**, but some lenders use the actual number of 365 days in a year instead. Therefore, ask your lender which method it employs when calculating interest.

## Step 3: Calculate Term Interest Rate

**Multiply the fraction of a year by the annual simple interest rate** to calculate the term interest rate. Continuing with the example, if the annual interest rate was 10 percent, multiply 0.25 years by the 0.10 annual rate to get a term rate of 0.025.

## Step 4: Calculate the Interest

**Multiply the term rate by the note's face value** to calculate the interest. If the example's face value was $20,000 multiply 0.025 by $20,000 to get the simple interest of $500.

#### Tip

For a simple interest promissory note, the interest plus the face value is the amount you need to repay on the maturity date. In the example, add $20,000 plus $500 to get the total due of $20,500.

For a discount promissory note, subtract the interest (discount) from the face value to arrive at the proceeds, which is the loan amount you actually receive. In the example, subtract $500 from $20,000 to get the proceeds of $19,500. However, you need to repay the full $20,000 at maturity. To calculate the effective rate in this case, divide the interest by the proceeds, multiplied by the faction of a year. In the example, multiply $19,500 by 0.25 to get 4,875. Divide the result into $500 to calculate the effective rate of 0.1026, or 10.26 percent, which is effectively higher than the actual interest rate. In fact, **if the interest rate is the same, a discount promissory note will always be a worse deal than a simple interest promissory note.**