Car Finance Paperwork

What is a Simple Interest Loan?

When you’re on the search for a new or pre-owned car loan around Alcoa, you’ll have to pay back the loan including interest. If you take out a loan, the interest is the amount you have to pay to the lender and consists of a percentage of the loan amount (principal). The most common types of interest are compound and simple.

Compound interest consists of the principal on top of the interest of the previous periods, meaning you’ll end up paying interest on the interest. However, simple interest is only based on the principal amount, meaning there is no interest charged on the interest. Follow along with Ole Ben Franklin Motors of Alcoa to learn how does a simple interest auto loan works and how to calculate a simple interest rate on a loan. 

How Does a Simple Interest Auto Loan Work?

Looking at a simple interest when shopping for a Mitsubishi? When wondering how to calculate a simple interest rate on a loan, it’s important to know car loan interest is calculated daily based on the principal. To find the daily interest rate, take the annual rate and divide it by 365 (or 366 during a leap year). For example, a loan balance of $10,000 and a 3% interest rate will find a daily interest of about $0.82.

Simple interest loans are repaid in monthly payments at the amount determined by the loaner. So, to answer, “how does a simple interest loan work?” It’s when Lenoir City drivers make a payment at the start of the loan, more of the monthly payment is put towards interest. When you’re learning how to calculate a simple interest rate on a loan, just keep in mind that as the interest amount is paid off, more of the remaining payments will go towards the actual principal balance. 

Want to learn more about interest rates? Learn how the interest rate is determined.

Benefits of a Simple Interest Loan

Now, that Sevierville drivers know what is a simple interest loan, they should know how it can benefit them. The main benefit comes from how much drivers save in interest. Other ways drivers can reduce the amount of interest on the loan are by:

  • Making larger payments by paying more than the minimum on each monthly payment.
  • Instead of 12 yearly payments, make additional payments to reduce the amount. 
  • Paying off a car loan early before the term ends. First, verify there are no penalties for early repayment with the loan.

Other Information About Simple Interest Loans 

Alcoa drivers should keep in mind the importance of full and timely payments. Simple interest loans allow borrowers to have the chance to save in interest, but late payments can cause borrowers to pay more in interest with a smaller portion going towards the principal. Too many late payments will not only lengthen the terms of the loan, but borrowers may end up paying costly late fees. 

Learn More About Car Financing at Ole Ben Franklin Motors of Alcoa!

If you’re still wondering, “what is a simple interest loan?” don’t hesitate to contact us.

Whether you’re wondering about how to get a car loan with bad credit or you’re thinking about paying off a car loan early, the experts at our Alcoa finance center are ready to guide you through the financing process.

Ole Ben Franklin Motors of Alcoa 35.7731939, -83.9945617.