What is a Simple Interest Loan?

Car Loan


When you opt to secure a loan for the purchase of a vehicle, you are charged a fee for borrowing that money. This is called interest. Generally, it is a percentage of the loan amount, or principal. The two primary forms of interest are compound and simple. Compound interest is based on the principal in addition to the interest of the previous periods. What this means is that you end up paying interest on the interest. Simple interest is based on the principal only. With this option, you are not charged interest on the interest. What is a simple interest loan, and how does a simple interest auto loan work? Let’s explore this option more in-depth below. 

How Does a Simple Interest Auto Loan Work?

Simple interest auto loans are certainly available around Phoenix and Gilbert. Not sure how to calculate a simple interest rate on a loan? We can help! In most cases, car loan interest is calculated daily depending on the principal. This daily interest is equal to the annual rate divided by the number of days in a year.

When you make a monthly payment on a vehicle that you have financed in Chandler, the money you pay goes toward the applied interest on your account and then the principal balance. You will have a set monthly payment with a simple interest loan. At the beginning, more of the monthly payment is put toward interest. As the amount of interest decreases, more of your monthly payment covers the actual principal balance. 

Perks of a Simple Interest Loan for Scottsdale Drivers

The biggest perk of a simple interest loan is the fact that you will end up spending less in interest over time. Additional ways to reduce interest include: 

  • Paying more than the minimum payment on your loan each month 
  • Making additional payments each month
  • Paying off the loan before your term ends

Note: If you are interested in paying off your loan before the loan term ends, make sure there are no penalties for doing so. Take a look at your loan agreement. If you will be charged a penalty for early repayment, paying off the loan early is likely not worth it. 

Additional Information About Simple Interest Loans 

Making payments on time is just as important if you have a simple interest car loan. Late payments could cause you to pay more in interest, and less of your payment will go toward your principal. One late payment will not have a huge impact on your payment schedule, but multiple late payments, along with the added fees, means your loan will take longer and be more costly to repay. 

Contact Trucks Only for More Information

If you have questions about your automotive financing options, the team at Trucks Only would be more than happy to assist you. Visit us today, or contact us for more information.

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