Calculating Ordinary Interest

There are two methods for calculating the time factor, T, when applying the simple interest formula using days. Because time must be expressed in years, loans whose terms are given in days must be made into a fractional part of a year. This is done by dividing the days of a loan by the number of days in a year.

The second method for calculating the time factor is known as ordinary interest. Ordinary interest uses 360 days as the denominator of the time factor.

Regardless of today’s electronic sophistication, banks and most other lending institutions still use ordinary interest because it yields a somewhat higher amount of interest than does the exact interest method. Over the years, ordinary interest has become known as the banker’s rule.