What is a Simple Interest Loan?

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When you take out a loan to buy a new or used car, you pay for borrowing money, i.e. interest. Interest is what you pay the lender for lending you the money, and is usually a percentage of the loan amount (principal). 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. Simple interest is based on the principal only, meaning interest isn’t charged on the interest. How do simple interest loans work and what do they mean for car buying? Read on to learn more!

How Does a Simple Interest Auto Loan Work?

Simple interest loans are widely available and include car loans. Wondering how to calculate a simple interest rate on a loan? Generally, car loan interest is calculated daily based on the principal. This daily interest is equal to the annual rate and then divided by 365 (or 366 during a leap year). If you have a loan balance of $10,000 and a 3% interest rate, for example, the daily interest would be about $0.82. When you finance a car and make a payment, the money goes toward the applied interest on your account and then the principal balance. Simple interest loans are repaid in predetermined monthly payments. 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.
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What Are the Benefits of a Simple Interest Loan?

The main benefit of simple interest loans is they can save San Diego drivers money in interest. You can also reduce the amount of interest on your loan by taking any of the following actions:

  • Paying more than the minimum payment on your loan each month
  • Making additional payments — not just once monthly
  • 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 give borrowers the opportunity to save in interest, but as with any loan, making payments on time is important. If you make a late payment, you could end up paying more in interest, meaning a lesser portion will go toward your principal. One late payment probably won’t throw you off schedule completely, but if it happens repeatedly, it could take longer for you to repay the loan. Not to mention, the added costs of late fees will make your loan more expensive to repay.

Learn More About Your Financing Options at Mercedes-Benz of Escondido!

Now that you know the answer to the question, “What is a simple interest loan,” don’t hesitate to contact our finance center at Mercedes-Benz of Escondido! You’re also welcome to visit us near Escondido and San Marcos. Our team of friendly and knowledgeable experts can answer any additional questions you may have, such as “How can I improve my credit score?”