• # Understanding Simple Interest

All City Select Auto Sales’ loans use the Simple Interest rate method of calculating the interest due on a loan.

Simple interest is not the only method available. Two other methods are “Compound Interest” and the “Rule of 78”. Using the Compound Interest rate method, you can pay interest on the interest accumulating on your loan. Using the “Rule of 78” rate method, if you pay your loan off before the contracted date, you will pay more interest than you would have if you had a simple interest loan rate. There are cases where these two other type loans can be advantageous to you.

City Select Auto Sales’ loans never have a Prepayment Penalty. Other lenders may charge a fee for paying off the loan early like when you trade-in your vehicle and pay off your vehicle early. This compensates that lender for not earning all the interest they anticipated. It could also happen if your vehicle is involved in an accident and an insurance company pays off your loan after the accident.

Simple Interest does not compound and increase the loan balance. The amount of interest to be paid for each scheduled monthly payment cannot increase. If you’re late or miss a car loan payment, the missed interest payment will not be added to the loan balance.

With a simple interest loan, the interest paid is calculated on the outstanding loan balance. As monthly payments are made and the balance decreases, the amount of interest paid will decrease. For example, consider a loan with a \$250 monthly payment, 6% interest rate and a \$10,000 balance. The interest for the next month will be \$50, 6% divided by 12 months times \$10,000, leaving \$200 of the payment to pay down the loan. For the next month, the interest charge will be \$49 on the \$9,800.00 balance, and \$201 will towards the principal balance. Making the regularly scheduled future payments continues reducing the interest amount each month and increasing the amount of the payment paying down the loan.

Money Savings Hints:
· Make extra principal payments any time during the loan but especially at the beginning of the loan. Since the simple interest is calculated on the remaining principal balance only, you will reduce the interest you pay totally by putting extra money toward the principal. The earlier you make the extra principal payment, the more interest on that payment you save!
· Make your payments on time. It will hurt your credit in the Credit Bureau and at your dealer. It can also lead to repossession and other needless charges. Making your payments on time are also recorded in the Credit Bureau and will help toward other financed purchases in your future like a new car or a home loan.
· Increase your down payment if you can afford it. Increased down payments reduce the principal balance there-by lowering the interest you will pay over the time of the loan. If your weekly or monthly payment stays the same as with the lower down payment you will also reduce the term of your loan and pay off your vehicle sooner.

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