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Do new car loans use compound interest or simple interest?
I want to make sure I know how a car loan works before I sign on the dotted line. Do car loans use simple or compound interest?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Car loans
charge simple interest, not compound interest. The good news is that this saves you money in the long run!Compound interest charges interest based on the amount of interest accrued and the principal. In contrast, simple interest charges interest based solely on the principal. Therefore, car loans have less interest than other types of loans that use the compounding method.
To get a more accurate idea of how much interest you will pay over the life of the car loan, grab an amortization schedule. This will show you how much money you pay each month from the start to the end of the loan.
Keep in mind that interest isn’t the only thing that costs a bit of moolah when you own a car. You also need to budget for car insurance, specifically full coverage, as most lenders will require full coverage for a financed vehicle.
To get the best rate for your car insurance needs, try using the number-one-rated car insurance app,
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