What “Simple-interest loan” means
On a simple-interest loan, interest accrues each day on the principal you still owe. Each payment covers the interest built up since your last payment, and the rest reduces principal. That is why a payoff quote includes a per-day interest figure.
The opposite is a precomputed-interest loan, where total interest is set at the start. Precomputed loans are less common on car loans today, and federal law bars the “Rule of 78s” method on consumer loans longer than 61 months.
How it shows up at the dealership
The finance office rarely mentions it. Check the contract for how interest is calculated and whether there is any prepayment penalty. Most mainstream lenders have none, but read it.
Timing matters in both directions. A payment made ten days late costs ten more days of interest on the full balance, on top of any late fee, so autopay a few days before the due date is a simple habit that pays.
Worked example · illustrative numbers, not a quote
$25,000 at 6% for 72 months, plus $100 extra a month
| Regular payment | $414/mo |
| Interest at the regular schedule | $4,831 |
| Paying $514/mo instead | paid off in 56 months |
| Interest saved | about $1,118 |
Tell the lender extra money should go to principal, not to the next payment.
What to do
- Confirm the loan is simple-interest with no prepayment penalty.
- Pay a few days early when you can; it trims interest slightly.
- Mark extra payments “principal only.”
What to say
“Is this a simple-interest loan, and is there any prepayment penalty? Please show me where it says so on the contract.”
Also called: simple interest.