What Is a Simple Interest Loan?

Tiny car with coins and finance paperwork

When you take out a loan to pay for a pre-owned or new Toyota vehicle, you’ll pay interest that’s a percentage of the principal (or loan amount). Interest comes in two main types: simple and compound. What is a simple interest loan, and how does it differ from a compound interest loan? While compound interest is based on the principle plus the interest of previous periods, simple interest is based on the principle alone. In other words, when you take out a compound interest loan in Cleveland, you pay interest on the interest.

So how does a simple interest auto loan work? In the guide below, explore the benefits of simple interest loans and learn how to calculate simple interest rate on a loan with the Metro Toyota finance center.

How Does a Simple Interest Auto Loan Work?

How does a simple interest auto loan work? You’ll repay your simple interest auto loan in predetermined monthly payments. Each time you make a payment, the money goes first toward the applied interest on your account and then to the principal balance. As a result, payments near the beginning of your loan term are weighted more towards interest. As you near the end of the loan term and the interest amount dwindles, more of the payment goes toward the principal. Keep reading to learn how to calculate simple interest rate on a loan, step-by-step.

How to Calculate the Simple Interest Rate On a Loan

For most simple interest loans, interest is calculated each day based on the principal amount. Here’s how to calculate simple interest rate on a loan:

  • To find the daily interest amount, divide the annual rate by 365 (or 366 during a leap year).
  • For example, say your loan balance is $10,000 and you have a 3% interest rate. The daily interest would come out to about $0.82.

Benefits of a Simple Interest Loan

For Parma drivers, the biggest benefit of a simple interest loan is saving money on interest. You can reduce your interest payments even further by doing the following:

  • Pay more than the minimum on your loan each month.
  • Making more than one payment each month.
  • Pay off your loan early if there are no fees for doing so.

Explore Your Auto Financing Options in Brook Park 

Need more detailed answers to the question, “What is a simple interest loan?” The experienced auto professionals at Metro Toyota are here to help—whether you need to know more about financing options or tire rotation. Reach out or visit us near Brunswick today!

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