Paying Less on a Simple Interest Auto Loan

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - February 1, 2021

Have you taken a good, hard look at your auto loan amortization schedule? It outlines how much of your monthly payment is applied to your interest charges and principal balance each month. If you're not sure what that means, we’re here to help you understand and show you how to pay less on your simple interest auto loan.

How Simple Interest Auto Loans Work

When you apply for vehicle financing, you’re not just applying for the loan to buy the car – you’re also applying for all the terms of your loan contract. This includes your interest rate and the length of your loan term. Unless you have top-tier credit, interest charges are typically included in your loan contract.

How much you pay in interest charges is determined by your loan term, too – not just your interest rate – using a formula. Most auto loans use the simple interest formula:

P x I x N = simple interest formula

  • P= Principal
  • I= Interest rate
  • N= Number of days between payments

You can use an online amortization calculator to see how much interest based on your loan terms. Simply enter your loan term, interest rate, and loan amount, into the amortization calculator, and all your payments are typically laid out there for you, including your total expected interest charges.

With a simple interest car loan, part of your monthly payment is applied to your interest charges, and the rest is put toward your principal (initial loan balance). Your interest charges accrue daily based on the current balance of your loan and your assigned daily interest rate.

If you look at an amortization schedule for your auto loan, notice that your interest charges decrease over time. Since your loan balance is lowering with each payment, you’re incurring less interest each month – which is great! The faster you pay off your loan, the less you pay in interest charges. Eventually, the majority of your car payment is directly applied to your loan balance.

Saving Money on a Simple Interest Auto Loan

Simple interest car loans offer you the chance to lessen your interest charges by paying on your auto loan more frequently, or by paying it off earlier. The faster you can bring down your loan balance, the less interest you accrue in total. For some borrowers, however, lowering your principal balance quickly is difficult – especially with a higher interest rate.

We’ve got five tips on how to decrease your total interest charges:

  1. Use a down payment – Having money to put down on a loan is a great way to lower the car’s selling price. The less you borrow, the less interest you pay. If you have poor credit and you’re expecting a high interest rate, it’s a good idea to save at least $1,000 or 10% of the vehicle’s selling price to cushion you from potential interest charges. Down payments of around this amount are almost always required for bad credit borrowers.
  2. Opt for a short loan term – For many borrowers, choosing their loan term may not be an option. However, if you have it, try to get a term that’s five years or less. Choosing a long loan term can lower your monthly payment, but your interest charges could go up considerably. The faster you can pay off your entire loan balance, the less you pay during a simple interest loan, so the shorter the better.
  3. Paying extra when able – Using tax refunds, work bonuses, or even a COVID stimulus check to pay extra on your loan helps in the long run. By paying extra when possible, you’re paying off your loan faster and decreasing your overall interest charges.
  4. Round up your car payment – Rounding up your monthly payment means paying extra with little effort. Let’s say you have a loan payment of $210, so try rounding up to the nearest $50. An extra $40 a month doesn’t feel like much, but every little bit helps. After 12 months, you’ve paid an extra $480 on your loan. And, less interest has accrued because you’re paying faster.
  5. Payment splitting – This method involves paying half of your monthly payment two weeks before your due date, then paying the other half on or before your due date. By doing this, you’re lessening how much interest accrues between payments. Doing this you’re not paying extra, just more frequently. If your monthly budget is tight payment splitting could be the solution for you.

Paying interest on an auto loan is extremely common, and many borrowers are worried when they see the total amount of interest charges they’ll pay while signing their loan contract. Most car loans don’t come with prepayment penalties, and the simple interest formula means you have some control over how much interest you need to pay while you’re financing a vehicle.

Bad Credit and Vehicle Financing

Your credit score is the main determining factor of what interest rate you can qualify for. If your credit is worse for wear, you may have to anticipate a higher interest rate. But you can work to reduce your interest charges with the tactics we outlined above. With careful management of your car loan, you can improve your credit score by making your payments on time, and increase your chances of getting a better interest rate the next time you need to finance.

Getting approved for a car loan with poor credit can be a hassle if you’re not sure where to start. Here at CarsDirect, we want to make it easier for you to find bad credit resources. We’ve cultivated a network of special finance dealerships, and our connections span the entire U.S.! To get matched to a dealer in your local area that knows how to help borrowers with less than perfect credit, fill out our free auto loan request form.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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