How Does Interest Work on a Car Loan?


Are you looking to finance a new or used vehicle but aren’t sure how it works? At Taz Loans, we are committed to making your vehicle purchasing experience easy, transparent, and stress-free. When you finance a car, you are essentially borrowing money that needs to be paid off. Usually, when money is borrowed from a financial institution or other lenders, interest needs to be paid along with the original borrowed amount. Keep reading to learn more about how interest works when financing a car with Taz Loans. Then, feel free to visit our FAQ page to learn more about us.

How is Interest Calculated on a Car Loan?

Interest for auto loans can be calculated in two ways: simple or precomputed. With simple interest, the rate changes based on your loan balance on the day your payment is due. So, your interest rates may start higher at the beginning of your loan term, but as you continue to pay off your loan, your interest rates will decrease with your principal amount (the amount you borrowed). For precomputed interest, the interest rates are calculated at the start of your loan and remain the same for each payment. If you plan to make extra payments, pay off your balance early, or pay over your minimum requirements, you will save more on interest with a simple interest loan. Precomputed interest loans are better suited for those with a shorter loan term or who are paying off a smaller amount.

Factors that Can Affect Your Interest Rates

When applying for a car loan, you may be asked to provide information to help the lender determine a reasonable interest rate. For one, you may be asked to prove your credit score. Having a high credit score (650 and above) will almost guarantee low-interest rates and a more flexible payment plan. For those with low credit scores (below 650), you may struggle to get approved for loans, and when you do get approved, you may pay very high-interest rates until you can prove you are trustworthy and can make payments on time. At Taz Loans, we are happy to work with individuals who may not have a good credit score for whatever reason, with absolutely no judgement. Our sub-prime auto loans can help you secure the car of your dreams and help you rebuild your credit in the process. It’s a win-win! Don’t hesitate to contact us if you want to learn more about our financing solutions and guaranteed loan approvals.