What is a Simple Interest Loan?

Signing Documents for Car

If you’re like a lot of our Phoenix customers who are wanting to finance the purchase of a used car, you likely have some questions. For example, what is a simple interest loan? How does a simple interest auto loan work? We’ll talk about that below, and even explain how to calculate a simple interest rate on a loan.

How Does a Simple Interest Loan Work?

So, what is a simple interest loan? How does a simple interest loan work? With a simple interest loan, you only pay interest on the principal. That’s different from a compound interest loan, in which you pay interest, not only on the principal, but also on the interest from the previous period. As you can see, simple interest loans cost less in the long run. Fortunately, simple interest loans are often available for auto financing. Our Finance Department can walk you through your options.

How to Calculate Simple Interest Rate on a Loan

We’ve taken the confusion away from car loans for lots of Glendale customers just like you. We love to keep our customers informed. So, here’s how interest on a simple interest loan is calculated:

How to Calculate Simple Interest Rate on a Loan

  • Multiply your principal by your annual interest rate
  • Divide that answer by 365 (number of days in a year)
  • The result is your daily interest rate

Example (What is a simple interest loan rate on a $10,000 loan with an annual interest rate of three percent?):

  • Principal = $10,000; Annual Interest Rate = 3%
  • $10,000 x .03 = $300 (annual interest)
  • $300/365 = $0.82 (daily simple interest)

Ways to Save With a Simple Interest Loan

Obviously, you pay less interest over time with a simple interest loan as opposed to a compound interest loan. But you can also save with a simple interest loan by reducing your principal. You can do that in the following ways:

  • Pay more than the minimum monthly payment
  • Making extra payments in addition to your regular monthly payment
  • Paying off the loan early (make sure your loan has no penalties for early repayment)

Talk to the Finance Department at Rocky's Auto Credit of Mesa

Our friendly finance managers are happy to explain the ins and outs of auto financing and simple interest loans to you. We make it easy to buy a car. You can even apply for financing online. We’re just a short drive away from Tempe, so drop by or contact us today!

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