Pros and Cons of Simple Interest Loans

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - April 25, 2019

Like all things, simple interest car loans have their pros and cons. Well, to be honest, it's mostly just pros. Simple interest auto loans are the standard these days, and simple interest beats the heck out of other ways of compounding interest when it comes to a bad credit car loan. Allow us to explain…

How Simple Interest Auto Loans Work

A simple interest loan works by charging interest daily based on the loan balance. When you make a payment, part of it goes toward interest and part goes toward paying the principal. In the beginning, a larger portion of your monthly payment goes toward interest, but as your loan balance decreases this slowly shifts.

The process in which you pay more interest at the start of your loan, but maintain a steady payment for a fixed amount of time is called amortization. Amortization is typically seen in both auto loans and mortgages. You can do the math to calculate this, or you can find an amortization calculator online to help you see how much of your payment is going toward interest charges.

In contrast to simple interest, compounding interest calculates interest on the principal including all accumulated interest. In other words, you pay interest on interest. Compounding interest is rarely used, especially in car loans, so this isn't something you need to worry about. If a lender is using a pre-computed loan, you should keep on looking for a lender that offers simple interest loans, instead.

The Pros and Cons of Simple Interest Auto Loans

Simple interest loans are a beautiful thing. Let's take a look at some of the benefits of simple interest auto loans:

  • Set payment amount, for a set time frame
  • Making larger payments than required reduces your principal balance more quickly, and therefore reduces your remaining interest charges
  • You're not paying "interest on interest"
  • Simple interest loans can be paid off early

On the flip side, there's one major con to consider, especially if you struggle with making on-time payments:

  • Late payments typically incur late payment fees, which are spelled out in your car loan contract. These fees can really add up, and have to be paid at the end of the loan term in order for a lender to release the lien on the title.

The Bottom Line

When you have bad credit and it's time to get another vehicle, be glad that simple interest auto loans are the norm, and you won't have to worry about late or missed payments adding interest on top of the interest you're paying. If you're having trouble finding a dealership to work with your credit situation, CarsDirect can help.

We work with a nationwide network of special finance dealers that have the lenders you need in order to get a bad credit car loan. Just fill out our easy and free auto loan request form and we can help connect you to a local dealership!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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