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 an auto loan work?

  • Most auto loans are simple interest loans, which means that the amount of interest you pay each month is based on your loan balance on the day your payment is due. If you pay more than the minimum due, the interest you owe and your loan balance can decrease.

  • 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:

  • Where does the money go on a simple interest loan?

  • When you make a payment on a simple interest loan, the money goes towards both interest and principal. For example, if the monthly payment is $300 and $140 worth of interest has accrued since your last payment, $140 of the payment covers the interest charges and the remaining $160 is deducted from the principal balance.

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