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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.
Liz Jenson · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
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 yourcar 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.
If you’re preparing to take out a car loan, you’ll need to get a car insurance policy, too.
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makes it quick and easy to find the best rates available on the insurance coverage you want. Just download the app and answer a few questions to see a comprehensive cross-analysis of the best car insurance policies that work for you. The average user saves $879 per year!MORE: What is APR and how is it calculated?
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- Gregory R.
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