At Drive, we care about car shoppers’ broader financial journeys and want them to be
informed so they can make the best decisions
for their budget.
“What is simple interest” is a common question, and despite being called “simple” interest, is easily misunderstood.
The first thing to grasp about a simple interest contract is the use of two terms – principal and interest. Principal describes the actual amount of money you financed for the purchase of your vehicle. And interest refers to the cost of paying for your vehicle over time instead of paying the full amount for the automobile up front.
In the early part of your loan, a bigger portion of your monthly payment goes to interest. This is because your principal balance is large. But as you continue to make payments, your principal amount will decrease, and the interest amount will go down with it. So, as you get toward the end of your automobile contract, more of your payment will go toward principal, and less
to interest.
Keep in mind that interest accrues daily, so the amount of interest you owe each month is based on how long it’s been since your last payment
was made.
IMPORTANT NOTE: When you pay on your scheduled due date, you pay the exact amount of interest agreed upon each month. When you pay earlier than your due date, less interest has accrued since your last payment, so more of your payment will go toward the principal balance.
Paying later than your due date, even by ONE DAY, allows more interest to accrue, so more of your payment will go toward interest. Consistently paying your simple interest loan late can cause additional payments to be added to the end of your contract – or in some cases, a large lump sum.
On the flip side, consistently paying early can reduce the overall amount of interest you pay. Not only that, but you may even be able to pay off your vehicle ahead of schedule.
To keep on track with a simple interest contract, it’s best to be as consistent as possible about making payments on time. Not only is that good for financial health, but it may also save money in the long run.
To gain more insight into how the auto finance process works, Drive provides access to helpful resources like the Budget Customizer when you pre-qualify. This customizable tool can help you find the best vehicle for your budget before you begin your simple interest contract.
