What Is a Simple Interest Loan?

Many Macon and Byron car shoppers ask, “What is a simple interest loan?” Simple interest is calculated solely on the principal amount of the loan. Meanwhile, compound interest is charged based on the principal and accumulated interest of previous periods, also referred to as “interest on interest.” 

Find out more about how a simple interest auto loan works below. Our finance experts at Five Star Chevrolet are here to ensure you understand your options and will also show you how to calculate a simple interest rate on a loan.

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. 

How does a simple interest auto loan work? 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 Macon 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. 

Contact Us for More Auto Financing Information 

Whether you still need help understanding what a simple interest loan is or want to speak with someone from our finance team, please don’t hesitate to contact us online or at (478) 266-3572. In the meantime, view our car-buying tips to ensure a seamless shopping experience from start to finish. We look forward to working with you!