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How often does a lender compound interest on a car loan?
I want to get a car loan, but I'm not exactly sure how the interest works—I’ve had to pay compound interest on other loans, and it put a pretty big dent in my bank account. How often does a lender compound a car loan’s interest?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
That’s a very smart question. Luckily, lenders do not compound the interest on a
car loan
, as car loans use simple interest, which is easier to understand and can ultimately save you money over compound interest.Simple interest bases the interest you pay solely on the principal of the loan. This means that you’re only paying interest on the initial loan amount, so your interest rate remains static. In a simple interest car loan, the amount of interest paid toward your car loan goes down each month, and more of your payment goes to the principal.
Conversely, compound interest bases your payments on the principal plus the overall amount of accrued interest, which costs more over time.
If you’re interested in learning how much you pay in interest each month, you can check out some amortization schedules online or ask your potential lender for one. This will put everything in perspective and make it easier to understand.
If you’re looking for a car loan, it’s good to keep in mind that you’ll need to get full coverage for your new ride. If you want to easily find the best deal on the coverage that you need, check out the
Jerry
app—we’ll get you customized quotes from dozens of car insurance providers so that all you need to do is pick the plan and provider that work best for you. And if you find one you like, we’ll help you switch, too!Best of luck with the loan!
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- Gregory R.
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