Simple interest loan question

Submitted by Sad_Cockroach_6864 t3_z79wn7 in personalfinance

Hey guys. I am not very financially literate when it comes to loans, etc so forgive me if this is dumb. I am taking out a 10k simple interest car loan. Rate at 7.39% (yes I know it’s high, there’s incentives to finance through the dealership that make it make sense). Overall my total interest will be $1179 over 36 months. My question is: with a simple interest loan, if I paid all 10k off the first month would I avoid the vast majority of interest? For example, if my monthly payment is $310 and $200 of the first months payment goes to interest, would I not end up just paying $200 in interest? TIA

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Werewolfdad t1_iy5g57y wrote

>My question is: with a simple interest loan, if I paid all 10k off the first month would I avoid the vast majority of interest?

Yes, that's how essentially all term loans work. Interest accrues daily.

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ReddSaidFredd t1_iy5le3c wrote

>there’s incentives to finance through the dealership that make it make sense

Incentives for the dealer, yes. What are the incentives for you paying an above-market interest rate?

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Sad_Cockroach_6864 OP t1_iy5n1fe wrote

Further discounts on an already discounted truck. Bringing the taxable value of the vehicle down. If I can in fact pay off the 10k in first month like I’m wondering about, then I will basically pay nothing in interest while reaping the benefits of the financial incentives for financing through the dealership

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rnelsonee t1_iy5o89r wrote

Yup, that works. Sometimes they'll offer incentives and expect to make more money via interest. But there's nothing wrong with paying it all down up front. Some loans have prepayment penalties, but it's not common. Check your agreement though to be sure.

$10k at 7.39% means you pay $10,000 × 7.39%/12 = $62 in interest in that first month, so $62 total if you pay it off by that first due date.

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ButterPotatoHead t1_iy5vdi2 wrote

In a simple interest loan the remaining balance and interest are essentially recalculated monthly. So in the first month you will owe $10k * 7.39% / 12 = $61.58 of interest. If you pay say $200, then you'll pay $61.58 of interest and $138.42 in principal. Your new principal balance will be $9861.58, and your interest the next month will be that amount * 7.39% / 12 = $60.73 etc.

However, double check that your car loan is simple interest, because most are not. They are usually on a schedule with a fixed monthly payment, with the interest high and principal low in the first month, and the opposite in the last month.

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Coronator t1_iy6aa5k wrote

99% of car loans are simple interest loans.

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