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Auto loans are a common option and are available through traditional banks, credit unions and online lenders, but they are not all the same. Beyond the various loan terms each lender offers, you should consider how your lender calculates interest before applying.
Simple interest car loans are standard and have several advantages that make them more attractive than pre-calculated interest car loans. They are much more common, and generally, by making additional payments to a simple interest car loan, it will help you pay less interest than your loan term.
How a simple car loan works
A simple interest car loan has a fixed monthly payment that applies to both your main balance (the original amount you borrowed) and the interest received in the month. Using simple profits is usually cheaper for borrowers than compound interest. Here we also take an interest in previous cumulative interests.
If you first take away a simple interest car loan, you will receive more monthly payments towards interest than the principal. Once you pay off your loan, most of your monthly payments begin to move towards the principal. If your outstanding loan balance is reduced, the amount you are charged with interest will decrease.
For example, consider a $36,000 car loan with a 6% interest rate and a four-year term. Over the lifetime of the loan, you pay approximately $845 per month and $4,582 interest. Interest is calculated by multiplying the outstanding principal balance by the annual interest rate and dividing it by 365. The amortization schedule breaks down how much of your payments will be on interest and principal balance.
| Interest paid | The principal paid | Remaining balance | |
|---|---|---|---|
| One month | $180 | $665 | $35,335 |
| 12 months | $139 | $707 | $28,494 |
| 24 months | $95 | $750 | $19,076 |
| 36 months | $49 | $796 | $10,616 |
| 48 months | $0 | $845 | $0 |
When comparing loan options, use an auto loan calculator to determine the total interest expense based on the terms received.
Benefits of a simple interest car loan
Simple Interest Auto Loans offers several important benefits that make them popular options.
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More affordable payments: As the amount paid per month is based solely on principal balances, monthly payments may be low if the lender uses compound or pre-calculated interest.
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Significant cost savings: If you decide to pay off your loan early, you can save on interest. For example, adding $100 a month can reduce hundreds of dollars from your interest invoice, while also reducing the loan duration at the same time.
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Generally provided: Simple interest car loans are the most common type of car loan, making it easy to find a lender who will suit your needs and provide competitive terms.
Simple ways to save on car loans of interest
By paying a minimum monthly amount, paying on time and signing up for Autopay, you may be able to reduce the interest you pay.
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Pay the minimum amount: Paying extra monthly or even double your payments can help you reduce your principal balance faster and repay your loan earlier.
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Make timely payments: If you are late in paying the loan, you may be charged a deferred fee and accrue additional interest on your simple interest car loan.
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Sign up for Autopay: Autopay helps to avoid missing payments and some lenders offer discounts for using the Autopay feature.
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Please check the penalties for advance payments. Although rare, some lenders will charge advance penalties. This can limit your savings, so be sure to check your loan agreement carefully to avoid any additional charges.
Conclusion
Using a simple interest-bearing car loan can lead to lower monthly payments. Additionally, if you can pay off your loan early, you may be able to save money on interest. When you’re ready to move forward, compare your car loan fees with a reputable lender. And make sure to prequalify or approve at least three lenders before signing on to one.
