Overhaulin'

What is the difference between accrual and simple interest calculation?

It just so happens that my friend is buying a car in a used cars sales lot. He and his wife make their regular payments and always add something extra towards the principal. 6 months later when they asked if they had saved any money in interests the guys told them they had not saved any just yet because they had not paid the full debt off. The people from the lot told them that their loan is not a simple but accrual method of calculate the interest. What is that? Does it mean that they are to pay the full amount of money in interest? Can they not reduce the interest money by paying off before the date stipulated in the contract? They were told there are no penalties for early pay off. I guess that meanss regardless of whether or not you pay off early, you still pay the full amount of money in interests, right? I mean, there would be no point in paying your loan early by making payments to the principal since you are still paying all the interests added up to your loan divided by the number of payments agreed on, right? I am sorry I am such an ignorant

Public Comments

1. When you take out a loan they either calculate the interest based on the term and the rate and add it to the balance along with any loan protection (eg £4000 loan + £500 interest over two years + payment protection £300 = £4800 divided by 24 payments (two years) makes £200 per month and you know that after that time it's all paid off). Alternatively they take the lump sum and add interest each month at whatever rate they've agreed with you so your statement shows a credit (your payment) and debits for interest and any loan protection you;ve taken. When you take a structured loan (the first example i gave) and pay if off early you get a rebate on the interest you did not pay. Eg if you paid the loan off after 12 months you'd have some interest to come back although it wouldn't be half because you owe more at the start therefore you pay more interest then. Hope that helps.