What is a Simple Interest Loan?

When it comes to purchasing a vehicle, sometimes simple is better. Even if you choose vehicle with all the bells and whistles courtesy of advanced technology and fun gadgets, if you are going to finance the purchase a simple interest loan is your best option. Simple interest loans are a structured type of loan that can be a cost effective option compared to their add-on loan counterpart.

Most autos purchased by financing are done so with a simple interest loans. By opting for this type of loan you would make the same monthly payment and part of your payment would go towards the interest while the rest would go towards the principal amount of your debt.  If you choose to finance with a 5 year loan, during the first 14 months of payment you would be paying a greater portion of interest than the principal amount. However, after that point, the balance shifts and a great portion of your monthly payment would be applied directly to the principal amount.

By choosing a simple interest loan you will avoid prepayment penalty for paying off the loan early. However the most important factor regarding simple interest loans is that you would only pay the interest on the existing balance, which is constantly being reduced by your monthly payments.

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Finding a car loan structured on simple interest calculations is fairly easy as it is the industry standard. Even better, they are often less expensive than ad on auto loans.

However, it may not be automatically offered or provided by the person handling your financing arrangement. Before committing to a loan either one you found on your own or one proposed through a dealer, it is your responsibility to fully comprehend the terms of the arrangement. Take the time to read the paperwork being presented to you and ask the loan provider if you are getting a simple interest loan. Once they say yes and you read the description of it for your self, breathe a sigh of relief.

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GOBankingRates Staff

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What is a Simple Interest Loan?
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