Sunday, June 19, 2011

Simple Interest Loan

I asked James, one of our Finance managers, "What is the most common question people ask when in your office?"

First of all, his office feels like the scale at the doctor, you may just not want to know or you may feel like you have to explain yourself...But instead of saying, "Sorry I went to a birthday party last night and ate a lot of cake," you say, "Well, a family member died and I accrued a lot of debt and spent a year trying to get the hang of it...that's why my credit is the way it is."

What you'll find is, we don't think about it either way. We have probably seen something worse, and we WANT to help you get in a car. When we look at credit scores we more so think, "how much down payment will they need, and what bank will be best to work with them?" So, don't be so afraid.

Back to James' answer. Simple Interest Loans. No one knows what they are, and that is what we use the most. Explanation, ready?

Simple interest is the amount paid on your loan. You can figure it through this easy calculation.

Simple Interest = (amount financed)x(interest rate)x(loan term, in years)
  • Amount financed = your cost of car - trade in & down payment + tax title and license
  • Remember the math...if your interest rate is 8.49% it will be calculated at 0.0849
Simple interest loans are easily calculated and easily reduced. You can save yourself a nice amount of money if you understand interest. Through simple interest loans there are no penalties if you prepay, or pay more than your "monthly payment" each month. All you have to do is let your bank know to apply it to your principal. Through simple interest loans you will daily accrue interest, if you pay off before your monthly "pay date" you can save the interest for that those few days. Which can be pretty substantial (THIS is why banks are so excited when you sign up for a debit authorization, because the likelihood of you paying early and saving $$ is low...beat the system! Go to the bank and make payments).

For Example: in a 72 month term (ahem, 6 years) one extra monthly payment a year will help you pay off your car in approximately 65 months (5 years and 5 months!)

Hopefully this will help you feel wise when you sit down in a finance office.

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