Are car loans simple or compound interest?

Does a car loan have simple or compound interest? Someone told me that compound interest is better, but I don’t really understand the difference.

Answer
Car loans and financial formulas can be confusing, so don’t worry! When looking at types of interest, car loans are generally simple interest. When you are borrowing money, this is a good thing for you. Here’s why:
  • Simple interest is a percentage of the loan amount. When you sign your car loan, you agree to pay a certain sum in interest, which a lender includes in your monthly payments. You pay off that amount as you pay off your loan.
  • Compound interest is calculated at each payment. With compound interest, you pay interest on each payment, meaning you could end up paying interest on interest. While it may not be great for car loans, compound interest is good in some circumstances! For example, if you invest, an account with compound interest will earn more money over time than an account with simple interest.
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Liz Jenson
Answered on Dec 02, 2021
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