How a simple interest car loan works

Getting to know how simple interest car loans work is a helpful step when shopping for credit or repaying a loan, and may enable you to save. Most auto lenders, such as RoadLoans and parent company Santander Consumer USA, provide simple interest financing, so watch our video and read on to learn more.


Simple interest car loan video


Simple interest contracts

Simple interest loans are made up of two important parts – principal and interest. Principal is the amount of money you borrow for your purchase while interest is the charge paid for borrowing that money.

With this type of loan, interest is calculated daily on the outstanding principal. At the start of the contract when principal is greater, you pay more in interest, but interest charges go down over time as the principal amount reduces.

If you pay on the scheduled date then you’ll pay the exact amount of interest agreed in your contract. However, the way simple interest car loans work also means a borrower has the opportunity to save and potentially pay off their car quicker. Here are three ways to do it.


3 ways to save with a simple interest car loan

  • Pay early – Make your monthly payment before the due date and less interest will have accrued than if you had paid on time. More of your payment will go toward principal as a result.
  • Pay more frequently – More regular payments, such as breaking the monthly installment in two and paying half twice a month, also reduce the interest due. Alternatively, paying half your payment every two weeks will effectively add an extra full payment by the end of the year. Be sure to time these payments to fulfill your monthly obligations.
  • Pay some extra – An additional lump sum, or adding to your monthly payments, is another way to pay down principal faster and save on interest costs.


What to avoid

Late payments, even by one day, cause you to pay more interest. The later the payment, the more money goes to interest, meaning less is applied to the principal balance. This can result in having to make additional payments beyond your original contract period or having to make a large payment at the end of your contract.


Making the most of simple interest

With the right steps, a simple interest car loan allows many customers to make a decent saving on interest and even pay off their car early. Apply for financing with RoadLoans and, if approved, you may be able to enjoy the benefits of a simple interest loan, too.


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