Q. What is a simple interest loan?
A. All SAFCO customers have simple interest loans. They’re common in auto lending and also referred to as financing.
- Simple interest loans are paid back in equal, monthly installments that are determined when you receive the loan. That’s why you’ll see the use of the term Retail Installment Sales Contract on your paperwork.
- Each monthly installment (a.k.a. payment) that you make goes FIRST toward any late fees you may owe, then toward the interest (the price of borrowing money) that has accrued since your last payment, and finally, what’s left of your monthly payment goes toward the amount you borrowed (the principal).
- Although you’ll be paying equal amounts each installment, how that money is applied to late fees and your interest and principal will change if you’re late or early in paying.
- Pay earlier than the due date and more of your payment will go toward your principal. Pay late and more of your payment will go toward fees and paying down the interest you owe, which means it will take longer to pay off your principal and vehicle.
Q. How is the interest calculated on my loan?
A. Interest on your loan is calculated daily. You an calculate your interest using this formula:
Your principal balance x Your annual percentage rate ÷ 365 (days in a year) = Daily interest charge
For example, you owe $12,000. Your annual percentage rate is 22%. So, using the formula above:
$12,000 x .22 ÷ 365 = $7.23 (your daily interest charge, also called per diem)
Q. Why am I paying more interest this month than last month?
A. The total amount you pay each month stays the same. How it is applied to what you owe (in interest, late fees, and principal) can change, depending on if you paid on time, early, or late.
Interest is calculated daily and adds up each day between your monthly payments. For example:
Your daily interest charge is $5.
- If the time between your current payment and your last payment is only 20 days, you would owe 20 days of interest at $5 a day. That equals $100.
- If the time between your current payment and your last payment is 30 days, you would owe 30 days of interest at $5 a day, or $150.
- If the time between our current payment and your last payment is 40 days, you would owe 40 days of interest at $5 a day, or $200.
And so on. In each case, your monthly payment will go FIRST toward any late fees you owe, then toward the interest you owe (examples shown above), and finally toward your principal balance.
When you have a lot of late fees or accrued interest, it will take you longer to pay off your vehicle, because more of your payment is going toward late fees and interest instead of going toward your principal.
Q. Why isn’t my principal balance going down very much?
A. Although you owe the same amount each month, how your payment is applied can change based on when you pay and if you have any late fees.
When you submit a payment each month, this is how it will be applied to what you owe:
- First, your payment will be used to pay any late fees that are owed.
- Second, your payment will be used to pay the interest you’ve accrued every day since your last payment (see How is the interest calculated on my loan? above)
- Third, what’s left of your payment after paying late fees and interest will be applied to your principal balance.
So, to pay off your principal balance faster, pay on time, avoid late fees, or pay early.