What is a Simple Interest Loan?

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Whether you’re looking for a new car or a used car model, you will likely be dealing with a simple interest loan. But what is a simple interest loan? How does a simple interest auto loan work, and what do they mean for car buyers? The team at Gunter CDJR Martinsville near Reidsville, NC will help you learn more below!



How Does a Simple Interest Auto Loan Work?

There are two main types of interest: compound and simple. Compound interest is based on the principal, as well as the interest of the previous periods. In other words, you pay interest on the interest that has accumulated. However, simple interest is based on the principal only, meaning that interest isn’t charged on the interest already accrued to the loan. Simple interest loans are widely available, and can be used when securing auto financing. Are you wondering how to calculate a simple interest rate on a loan?

  • For the most part, car loan interest is calculated daily based on your principal amount.
  • Your daily interest is equal to the annual rate and then divided by 365 (or 366 during a leap year).
  • So if you have a balance of $10,000 at a 3% interest rate, for example, the daily interest would be about $0.82.

When you finance a new car, your payments go toward the applied interest on your account first, and then the principal balance. To make things easier, monthly payments are predetermined with the interest calculated in. At the start of the loan, more of the monthly payment is put toward interest, and as the interest dwindles, more of the payment is put toward the actual principal balance.

What Are the Benefits of a Simple Interest Loan?

Simple interest loan can help Martinsville drivers save money when they’re shopping for a new car. However, there’s more ways to save when you finance a new or used car! Including:

  • Making additional payments — not just once monthly
  • Paying more than the minimum payment on your loan each month
  • Paying off the loan before your term ends (make sure your loan has no penalties for early repayment)

What to Consider About Simple Interest Loans

Simple interest loans can help you save, but it’s always important to remember to pay on time and in-full! Late payments could leave you paying more in interest, negating the advantages you were looking for. One late payment probably won’t put you totally underwater completely, but if you make a habit of it, it will take longer for you to repay your loan.

Learn More About Your Financing Options at Gunter CDJR Martinsville!

Now that you know the answer to the question, “What is a simple interest loan,” don’t hesitate to contact us with any questions! The team at Gunter CDJR Martinsville is always ready to help Danville and Reidsville, NC drivers work out a finance plan that’s right for you, and we can always answer additional finance questions you may have, like whether extended warranties are worth it, how to improve your credit score, or if you can lease a used car.

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