how does a simple interest auto loan work

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Amortizing loan

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  • What is a simple interest car loan?

  • A simple interest car loan is an amortizing loan. This means that a portion of each payment goes to pay down the loan balance, and when all of the payments have been made, the loan will be paid off. The loan payment is calculated to fully amortize the loan over the selected number of payments with a level payment.

  • How does interest build up on a car loan?

  • Interest building up daily sounds intimidating, but this can work to the advantage of car buyers. As a buyer pays down their car loan, the amount of interest paid decreases while the amount of principal paid increases 鈥?all while the monthly payment stays the same. Here is how simple interest is calculated using this example auto loan:

  • How does an auto loan work?

  • The borrower agrees to pay the money back, plus a flat percentage of the amount borrowed. (In compound interest, the interest earns interest over time, so the total amount paid snowballs.) Auto loans are amortized .

  • How is interest calculated on a simple interest loan?

  • Interest Calculated on Principal Balance. With a simple interest loan, the interest paid is calculated on the outstanding loan balance. As monthly payments are made and the balance decreases, the amount of interest paid will decrease.

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