What is a Simple Interest Loan?

When you borrow money, you usually have to pay an additional amount to the lender for lending you the money– this amount is called interest. Simple interest is based on the principal (loan amount) only, whereas compound interest is based on the principal and the interest of the previous periods. With that said, a simple interest loan is when you borrow money and you have to pay back the principal as well as interest based on the principal. 

What does that mean for car buying then? How does a simple interest auto loan work? Below, Rountree Moore Nissan covers all of the details, including how to calculate a simple interest rate on a loan. Read on before shopping for your new or new-to-you vehicle near Newberry!  

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. 

What Are the Benefits of a Simple Interest Loan? 

The main benefit of simple interest loans is they can save Live Oak 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 Rountree Moore Nissan! 

Now that you know how a simple interest auto loan works and how to calculate a simple interest rate on a loan, what’s next? Feel free to explore your options further with Rountree Moore Nissan, whether you’re from Gainesville or Lake City. We’re happy to help you out, so get in touch with us soon!