What is a Simple Interest Loan?

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Purchasing your next new or used vehicle will most likely require you to take an auto loan. When choosing an auto loan, you’ll find that there are two main types of interest: compound and simple. With a compound loan, your interest is not only based on the principal, but the interest of the previous periods as well. Simply put, you end up paying interest on the interest. Meanwhile, simple interest is based on the principal only. This means you aren’t paying additional interest on your interest. How do simple interest loans work? Find out more below!

How Do Simple Interest Auto Loans Work?

How does a simple interest auto loan work? These loans are widely available and include car loans. When you finance a car with a simple interest loan and make a payment, the money is first applied to the interest on your account and then the principal balance. Simple interest loans are repaid in predetermined monthly payments. At the beginning of the loan, more of your monthly payment goes towards the interest. Once the interest dwindles, a larger portion of the payment is put toward the actual principal balance.

How to Calculate Simple Interest Rates on a Loan

Trying to figure out how to calculate a simple interest rate on a loan? Normally, your car loan interest is based on the principal and calculated daily. This daily interest is equal to the annual rate and then divided by 365 (or 366 during a leap year). For example, if you have a loan balance of $10,000 and a 3% interest rate, then your daily interest charge would be about $0.82.

What Are the Advantages of a Simple Interest Loans?

The main reason Portsmouth drivers choose simple interest loans is that they save the borrower money on interest. To further reduce the amount of interest you’ll pay on your loan, we recommend taking any of the following actions:

  • Make more than the minimum payment on your loan each month.
  • If able, consider making additional payments — not just once monthly.
  • Try to pay off your loan before the term ends. If you’re planning to take this step, make sure there are no penalties for early repayment.

Considerations for Simple Interest Loans

While opting for simple interest loans give Stratham borrowers the opportunity to save in interest, making payments on time remains important. As with many loans, if you make a late payment, you could end up being penalized with a fee and paying more in interest. This means a lesser portion will go toward your principal. While one late payment probably won’t be a big issue, repeated late payments could cause you to rack up fees and increase the time it takes to pay off your loan.

Learn More About Your Financing Options at Dover Honda!

Now that you know how simple interest auto loans work, speak with our finance center at Dover Honda about how to qualify! We can help you decide which car loan is best for your situation, and apply for financing!

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