What is a Simple Interest Loan?

Calculator with money

The two most common types of car loans are compound interest loans and simple interest loans. Compound interest loans work by charging interest on the principal amount as well as interest from the previous periods. A more basic way of explaining it would be charging interest on the interest. A simple interest loan only charges on the principal amount and not on the previous interest paid. Read on for the answer to, “How does a simple interest auto loan work?” 

How Does a Simple Interest Auto Loan Work?

How does a simple interest auto loan work? Simple interest loans are more commonly used and more attractive to Valrico car shoppers because it only charges interest on the principal amount owed rather than the principal amount and the interest paid during previous periods. The daily interest rate on your car loan is equal to the annual rate and then divided by 365. So,”How to calculate simple interest on a loan?” If you have a loan balance of $10,000 and your interest rate of 3%, then the daily interest rate would be $.82. 

How to Calculate Simple Interest on a Car Loan

When you begin financing your car, your monthly payments go toward the applied interest and then the principal balance. When you choose a simple interest loan, you’ll pay back your loan in predetermined monthly payments. Most of your monthly payments will go toward interest, but as the interest lessens, you’ll begin to pay off the principal amount.

Toy car on a calculator

What Are the Benefits of a Simple Interest Loan? 

A simple interest auto loan saves Brandon drivers money on financing. You’ll have lower monthly payments and will be able to own your vehicle outright quicker because you’re only paying interest on the principal amount rather than paying interest on your interest. You’ll also be able to:

  • Pay more than the minimum each month to get the loan paid off quicker
  • Make additional payments
  • Pay off the loan before the loan period ends (ensuring there are no penalties for doing so in your contract)

Considerations About Simple Interest Car Loans

Simple interest car loans save drivers money in the long term on interest, but make sure you’re keeping up with your monthly repayments. Interest easily builds up, and your credit score will take a substantial hit if you default on your loan. If you pay your bill every month, then a simple interest car loan is the best option for you. 

Learn More About Your Financing Options at Stingray Chevrolet! 

Now that you know “what is a simple interest loan,” and how to calculate simple interest rate on a loan, apply for financing today! Use our payment calculator to see how much you can afford to spend on a Chevrolet, and value your trade-in so you can repay a higher amount initially! Visit us in Stingray Chevrolet to meet with our finance team and test-drive your favorite models!

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