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What is a Simple Interest Loan?

 

Tiny car with coins and finance paperwork

 

Are Car Loans Simple Interest or Compound Interest?

When you finance a pre-owned or new Toyota, you’re taking out a loan to pay for it. For the service of lending you money, your financial institution will charge you interest — a percentage of your principal owed each month along with your regular auto loan payment. There are two key types of interest:

  • Compound Interest — Based on the principle plus the amount of interest previously paid.
  • Simple Interest — Based on the principle only.

What is a simple interest loan, and how does it impact the amount you pay each month on your car loan? In the guide below, the Don Ringler Toyota finance team shows you how to calculate the simple auto finance interest rate on a loan, and how to find the best interest rates in Belton for your next vehicle purchase.

How Does a Simple Interest Auto Loan Work?

With a complex interest rate, you pay interest on your principle as well as on the interest previously paid (known as applied interest). In other words, you pay interest on your interest. How does a simple auto finance auto loan work? By contrast, simple interest loans are repaid in predetermined monthly payments. So you’ll pay proportionally more of your loan amount toward interest at the start of your loan, and more toward the principal amount as the remaining interest dwindles.

How to Calculate the Simple Interest Rate On A Loan

A simple auto finance interest loan charges interest daily based on the principal loan balance. To estimate how much you’ll owe each month, all you need to do is learn how to calculate the simple auto finance interest rate on a loan. Here’s how:

  • Say you owe a total of $10,000 for your new car, and your interest rate is 3.0%.
  • First, find 3% of your principal to determine the annual interest rate of $300.
  • Then divide the annual rate by 365 to find your daily interest rate of $0.82.

What Are the Benefits of a Simple Interest Loan?

So, how does a simple auto finance interest loan work? As you might have guessed, simple interest loans can save you money in interest over time. As long as you’re confident that you can make all your car loan payments on time, simple interest loans offer great benefits for drivers in Killeen and Waco:

  • A predetermined payment amount and repayment time frame.
  • Paying extra on your loan each month reduces your principal balance more quickly, reducing the remaining interest amount.
  • You won’t be paying “interest on interest”.
  • You have the option of paying off your simple interest loan early.

How Often is Car Loan Interest Compounded?

Since the majority of simple auto finance loans have simple interest, you will most likely not have to worry about your rates compounding. As you pay your monthly fee, you’ll see that in the beginning, your payments will go towards covering the interest and it will go down over time to then enable you to make payments to the actual loan balance.

Finance a New or Used Toyota for Sale in Temple!

Questions about trading in your current car or calculating your monthly loan payments or are you wondering what a good interest rate for a car loan is?? The team of auto finance experts at Don Ringler Toyota is here to help. Browse and shop online, or reach out to talk auto financing with one of our team members today.

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