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What is a Simple Interest Loan for a Car?


Planning to purchase your next new or used Covina vehicle with an auto loan? Taking out a loan means you are paying to borrow money, i.e. interest. Interest is owed to your lender in exchange for borrowing the money out to you. Often, the interest you pay is based on a certain percentage of your principal (total loan amount). You will find there are two main types of interest: simple and compound. Compound interest is derived from the principal, plus the interest of previous periods. Essentially, you pay interest on the interest. Simple interest is based solely on the principal, so you will not be paying interest on the interest. Want to know more about ‘how does a simple interest loan work?’ Our finance team provides important details to know, below!



How Does a Simple Interest Auto Loan Work?

Simple interest loans are a very common type of auto loan among La Puenta drivers. Need to know how to calculate the simple interest rate on a loan before you make any final decisions? Auto loan interest is typically calculated daily, based on the principal amount. The daily interest is equal to the annual rate and divided by 365 (366 if you’re in a leap year).

  • Using this information, someone with a loan balance of $10,000 and a 3% interest rate would be paying $0.82 in daily interest.

Simple interest loans are to be paid off in monthly increments by a date set by your lender. Your auto loan payments are first applied to your interest, then the remaining amount is applied to the principal balance. When you’re in the very early stages of repaying your loan, more of the monthly payment goes toward interest. As the interest owed starts to lower, more of the payment is applied toward the principal balance.

Why Choose a Simple Interest Loan?

Many Glendora drivers will find that simple interest loans are favorable because they can save you money on interest. Here are some tips you can utilize to further reduce the amount of interest paid on your loan:

  • If possible, pay more than what your minimum monthly payment amount calls for each month
  • Make extra payments in addition to your required monthly payment
  • Finish paying off the loan before the specified date on your contract (if you do this, just be sure to double-check whether your loan has pre-payment penalties)
  • Take steps to improve your credit score before applying

Simple Interest Loan Factors to Consider

While a simple interest loan can help you save money in interest, you need to feel confident you can make your payments on time. Late payments could cause you to pay more in interest than you would have otherwise, with a smaller amount of the payment being applied to your principal. If you’re late on just one payment, you probably won’t take too significant of a financial hit, but repeated late payments can make it take a lot longer to fully repay the loan. There are also late fees to consider, which will increase your total amount paid even more.

Reach Out to Mercedes-Benz of West Covina to Learn More

Have lingering questions in addition to ‘what is a simple interest loan?’ Contact us today to speak with a friendly specialist from our finance team! They’ll listen closely to your unique financial situation and guide you toward the most beneficial type of loan, be it a simple interest loan or otherwise. Want to get pre-approved for financing with Mercedes-Benz of West Covina? Apply online to get started today!

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