What is a Simple Interest Loan?

There’s more than just one kind of financing for Macon and Byron drivers who are shopping for a new or pre-owned vehicle at Five Star Cadillac. When researching your next auto loan you might wonder what a simple interest loan is. When you have a loan, there are two kinds of interest: simple and compound. Compound interest is calculated based on the original loan amount (principal) and the interest that’s already been paid. In essence, it’s paying interest on interest. Simple interest is based on a percentage of the principal amount. How does a simple interest auto loan work? The Five Star Cadillac finance department explains how to calculate the simple interest rate on a loan and more. 

How Does a Simple Interest Auto Loan Work?

Simple interest loans are widely available and include car loans. How does a simple interest auto loan work? 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. That’s how to calculate the simple interest rate on a loan. 

When youfinance a carand 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 Robins Air Force Base 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 Five Star Cadillac! 

What is a simple interest loan? Just one of the many ways you can acquire the vehicle you need. There are as many different financial situations as there are car buyers in Warner Robins. That’s why Five Star Cadillac provides so many different finance and lease options. We want you to get the car you want in a way that works with your finances. You can prepare your car-buying budget with the complimentary Five Star Cadillac payment calculator. Find out your buying power with us!