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What is a Simple Interest Loan?

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Whether you’re looking to finance an exciting new Honda or a quality used vehicle in the New London area, you will likely be offered a simple interest loan. What is a simple interest loan? A simple interest loan is a non-compounded loan. This means that your interest is calculated off the remaining principal balance of your loan, so that you pay a set monthly amount plus interest. If you can manage to pay more on this set amount, it will lower your payments going forward. Learn more about how a simple interest loan works in this guide from the finance experts at Westbrook Honda.

How Does a Simple Interest Auto Loan Work?

First of all, Branford car shoppers need to know the difference between compound and simple interest. Compound interest is based on the principal, as well as the interest of the previous periods. This means that borrowers pay interest on the interest that has accumulated. Simple interest, on the other hand, is based on the principal only, which means that interest isn’t charged on the interest already accrued to the loan.

Simple interest loans are among the most common for anyone looking to secure auto financing. The following will explain how to calculate a simple interest rate on a loan:

  • Typically, car loan interest is calculated daily based on the amount of the principal.
  • The daily interest is equal to the annual rate and then divided by 365 (or 366 during a leap year).
  • Example: If you have a balance of $10,000 at a 3% interest rate, the daily interest would be about $0.82.

When financing a new car, your payments go toward the applied interest on your account first, and then the principal balance. Your monthly payments will factor in the calculated interest rate at the start of the loan, which means that more of the monthly payment is put toward interest. As the interest is paid down, more of the payment is put toward the actual principal balance. Feel free to use our convenient online payment calculator to determine what your monthly payments will be, and budget accordingly.

What Are the Benefits of a Simple Interest Loan?

A simple interest loan can actually help you save money in the long run. Once you apply for financing and have been approved, consider the following to help you save more on a car loan in the Middletown area:

  • Pay more than the minimum monthly amount.
  • Make additional payments each month.
  • Pay off the loan before the term ends (make sure the loan has no penalties for early repayment).

What to Consider About Simple Interest Loans

Simple interest loans can help you save, as long as you keep up to date with your payment schedule. Late payments can leave you paying more in interest. One late payment probably won’t have a significant effect, but if you make a habit of it, it will take longer and cost you more to repay the loan.

Explore Your Financing Options at Westbrook Honda!

We’ve answered the question: “What is a simple interest loan?” Now, don’t hesitate to contact us with any questions. Our finance specialists are standing by to help you secure a car loan and payment schedule that is the best fit with your budget. Planning on trading in your old car? Use our value your trade tool to get a quick estimate of how much your car is worth, and apply that towards your down payment. We’re ready to put you behind the wheel of a new Honda or dependable pre-owned vehicle of your choice today!

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