What is a simple-interest contract in auto financing?

Just because auto financing involves simple-interest contracts doesn’t mean everyone understands them.

Asking the question “What is a simple-interest contract?” is not unusual.

And as a large auto lender with several million customers, Santander Consumer USA knows that many borrowers are confused by how simple-interest contracts work.

That confusion can cost a borrower money, so it’s in his/her interest, your interest, to make those monthly auto payments on time, at least, or even early if possible.

To help you understand how simple-interest contracts work, we’ve produced a short video that should help. “How Simple Interest Works” appears above and in the Learning Center with other useful auto finance information, helpful videos and more.

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TRANSCRIPT

Simple interest contracts

At Santander Consumer USA, we appreciate your business and want to make your experience with us a great one!

Let’s talk about simple interest contracts.

Two very important terms associated with simple interest contracts are Principal and Interest.

Principal refers to the actual amount of money you financed on the purchase of your vehicle. Interest covers the cost of paying for the vehicle over time instead of paying the full amount up front.

In the beginning, a large portion of your monthly payment goes to interest. This is because your principal balance is large. But as you continue to make payments, your principal amount will decrease, and the interest amount will go down with it. So, as you get toward the end of your contract, more of your payment will go toward principal, and less to interest.

Interest accrues daily, so the amount of interest you owe each month is based on how long it’s been since your last payment was made.

When you pay on your scheduled due date, you pay the exact amount of interest agreed upon each month. When you pay earlier than your due date, less interest has accrued since your last payment, so more of your payment will go toward the principal balance.

When you pay later than your due date, even by ONE DAY, more interest has accrued, so more of your payment will go toward interest. Consistently paying late can cause additional payments to be added to the end of your contract – or in some cases, a large lump sum. Yikes!

Consistently paying early can reduce the overall amount of interest you pay, and you may even be able to pay off your vehicle ahead of schedule. Yes!

So be as consistent as possible about making your payments on time, and you may save money in the long run. It’s in your best interest!

For more videos and smart financial tips, visit our Learning Center at SantanderConsumerUSA.com.

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