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How does car loan interest work?

I’m looking for a car loan right now and I’m so confused by the interest rates. How does car loan interest actually work?

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Liz Jenson · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Car loan interest can be a little confusing, so it’s understandable that you’re at a loss! Interest works in two common ways: simple interest and precomputed interest.
Car loans have simple interest. When you start to pay a loan with simple interest, a large portion of your payments will go towards
interest
while the remainder goes towards the principal, or the original amount that you borrowed with your loans.
But as you continue to make payments, more and more of your payments will go towards the principal of your loan. This means that if you pay more than your usual monthly payment, you can reduce your principal and the amount of interest that you owe.
Other lenders will use precomputed interest. This means that the amount of interest is calculated when you take out the loan based on how much you borrow. Then, that calculated amount is divided evenly across all of the loan payments you’ll make. This means that you’re paying the same amount of interest and principal each time.
While understanding interest is difficult, finding the right insurance policy for your new vehicle with the
Jerry
app is easy! Just download the app and answer some quick questions to see your policy options in a comprehensive list. When you find a quote you like, Jerry can cancel your old policy and switch the policy on your behalf.
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Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.

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