All sorts of people take out car loans to buy themselves a new set of wheels. But no matter who you are, if you understand how your loan works and make informed decisions, not only will you enjoy peace of mind but you can also save time and money.
Simple Interest Loan
One type of loan is a Simple Interest Loan, which is used for most car loans. It's also the type of auto financing that Capital One offers. So how does a Simple Interest Loan work?
When you borrow money, you have to pay back the principal, (which is the actual amount you borrowed) as well as the interest (this is the cost for borrowing the money). This is done through fixed monthly payments over the term of your loan.
When you first start making payments, a higher percentage of your fixed monthly payment will go towards the interest, and whatever's left over, then goes to the principal. However, if you make full and scheduled on-time payments every month, an increasingly higher percentage will be applied to the principal and less to interest each month until it's ultimately paid off.
Interest calculated logic
Here's why that is. The interest is calculated against your loan's outstanding principal. At the beginning of the loan the principal balance is large, therefore, so is the interest. But, as time goes on and you start paying down your principal, the amount of interest you pay every month goes down with it.
More and more of your fixed payment will go towards the principal, rather than interest, until your loan is eventually paid off.
It's also important to understand, with a Simple Interest Loan, the interest accrues daily based on your outstanding principal balance.
And because interest accrues daily, when you make your payment really makes a difference. If you make a monthly payment exactly on your due date, you'll pay the exact amount of interest that you originally planned.
Paying early will save money
However, if you make a payment before your due date, less interest will accrue (remember it adds up daily), so more of your fixed payment will go towards the principal. But, if you make your monthly payment late, more interest will accrue so more of your fixed payment will go toward the interest.
Ultimately, making just one or two early or late payments may not make a huge difference in the amount of interest you're paying.
But if you get in the habit of paying late, you could end up paying more in interest than you originally planned. But if you get into the habit of paying early, you'll save money and you could even pay off your loan sooner than expected, which would be cause for celebration!
Maybe you could use the money you saved in interest to reward yourself with something that you'll really love. Simple Interest Loans really can be well pretty simple.
Other web page resource
Auto Loans, Financing for New: https://www.capitalone.com/auto-financing/faq
Understanding Interest: https://www.capitalone.com