There are so many options to choose from when deciding on a new car purchase: Automatic or standard? Red, green or blue? SUV or sedan? Additional questions you may have could even relate to the type of loan you choose and whether an add-on auto loan is a smart option or not.
How Add On Auto Loans Work
An add-on loan (aka installment loan ) affects the direct structure of the loan. The add-on loan is structured so the total interest amount is calculated at the very beginning of the loan–it is then added onto the total amount you are borrowing and then the amount is divided into monthly payments. This method makes planning your monthly payments much easier, but can cost the borrower significantly more money than finding a simple interest structured auto loan to finance the purchase of a car.
Choose Simple Interest Over Installment Auto Loans
Add-on loans tend to be more expensive to pay off than their simple interest loan counterparts as they require borrowers to pay interest on the total loan amount over the entire loan period. If you choose to pay off the loan early to lower the amount of money you are paying, you may get hit with a prepayment penalty thus losing a good chunk of change. When it comes to borrowing money to finance the purchase of your vehicle, a simple interest loan would be a better choice. Before purchasing a vehicle, take the time to investigate your financing options prior to going to the dealer and make sure to try to locate a simple auto loan. If you choose to finance through the dealer, make sure you ask if you’re getting a simple auto loan. The difference between the right and wrong loan can cost you dearly in interest.