What Is a Simple Interest Loan?

How Does a Simple Interest Auto Loan Work?

Before we can answer “how does a simple interest auto loan work,” we have to compare it to the alternative. In a pre-computed loan, the interest is fixed throughout the length of your loan. That means it won’t change, no matter what you do. A simple interest loan, on the other hand, is the more popular method. In a simple interest loan, you pay interest off the remainder of your principal balance. That means that if you decide to pay extra on your monthly fees, you’ll actually reduce both the principal balance and interest as you go.

What Happens if I Miss a Payment?

Though you can easily get ahead of payments when you choose a simple interest auto loan, what happens if you miss a payment? Late fees. These late fees can build over time and have a serious consequence on your ownership, so it’s important to read the fine print carefully when you sign your contract. And if you’re worried about making your payments on time, our finance team can help you work out a plan that works for you.

How to Calculate Simple Interest Rate on a Loan

Learning how to calculate a simple interest rate on a loan is easier than you might think. Just multiply the principal by your interest rate by the length of your loan term in months. Walk through an example below:

• Your loan is $10,000 with a 6% interest rate over 12 months.
• Your first monthly payment will be $250 with $200 toward the principal and $50 toward interest.
• The next month, $201 will go toward the principal and $49 will go toward interest.

Want to crunch numbers right now? Check out our payment calculator for help!

Get Expert Auto Financing Advice at Lexus of Cherry Hill

If you’re in the Philadelphia area, get more car buying tips at Lexus of Cherry Hill and feel free to apply for financing. If you still have questions, or want to learn how to trade in a financed car, contact us online or swing by Mt. Laurel to chat with our experts!