| First, let us say that you borrow 4000 for a year at | | | | money from borrowers. People giving out car loans |
| 20% interest. With the banks, that interest is applied | | | | are usually happy for you to pay it off early if you |
| over the year on a daily, or maybe a monthly basis. | | | | wish. This is not always the case with the traditional |
| For example, they work out how much you have left | | | | bank loan and if you are likely to be able to pay off |
| to pay and then calculate one day's interest on that | | | | extra amounts you should check with your lender |
| amount. As your balance reduces, the interest charged | | | | whether it is allowed. |
| each day reduces. This makes it very a complicated | | | | So why are the car loan lenders happy to let you pay |
| calculation, as you need to take into account how | | | | off early? Well again it is down to the simple way in |
| much has been paid off before you calculate the | | | | which they calculate the interest. Because they |
| interest. | | | | calculate the interest on day one and apply that to |
| But the situation is much easier with car loans! That, | | | | your loan, whether you pay off the loan in the agreed |
| unfortunately, is the only good news. If the interest rate | | | | term or in half of the time, they still receive the same |
| is 20% and the amount borrowed is 4000, then the | | | | interest. In fact, if you pay it off early, they themselves |
| interest for the year is 800. Simple. But the bad news, | | | | then have the extra cash available to lend to another |
| when you look closely, is that there is no credit given | | | | lender. So there is no reason for them to refuse over |
| to the amount of the loan that has been repaid. Each | | | | payments. But with a traditional loan if you pay it off |
| and every month the interest charged is the same. | | | | early, you are then no longer paying the interest and |
| This situation is worse still as the term of the loan is | | | | the lender loses out. |
| increased. On our example load, the interest over 3 | | | | With this initial calculation of interest, a car loan |
| years could be 800 per year or 2400 in total. Yes, with | | | | repayment is a lot easier to calculate than a traditional |
| a bank calculating the interest in the daily manner, you | | | | loan, but the lender ends up charging you a lot more |
| would reasonably expect that after 2 years at least | | | | interest over the course of the loan and there is no |
| half of the loan would have been repaid, so the | | | | saving if you pay it off early. Before you sign on the |
| interest charged each day or month would have | | | | dotted line for a new car loan, ask your friendly bank |
| halved. | | | | manager if they have any suitable loans available and |
| There is also another way that the car loan gets more | | | | what they would cost. |