Not So SIMPLE Interest Loans

"If you really want this (car, boat, camper, whatever), you need to BUY IT NOW!"..... "This deal won't be available tomorrow.".... "You can take it home today with nothing down."..... "Taxes, extended warranty, we will add it all into the loan for you."..... "We have a fantastic offer for you today only."....."No payments due for six months, then we can spread the payments over ten years just for you".....

Sound familiar? I think we have all heard these lines. Most of us have at one time or another fallen for a sales pitch. Especially, when we really WANT it, but actually can't quite afford it.

Several years ago, my husband and I fell for just such a pitch. We really wanted to buy a travel trailer, and the low payments spread over ten years sounded like such a easy way to make it ours. "We can pay it off early," we told ourselves.

Did we pay it off early? Of coarse not. We love our camper, but bought it very dumbly.  We blindly paid on our loan for longer than I care to admit. As a result, we have almost entirely paid interest. Only now, after wising up, are we touching the principal.  Because of the recession, our travel trailer, like many homes is worth less than we still owe on it.

A simple interest loan is a loan where the interest accrues EVERY DAY. If you are told that no payments are due for six months, you will still be accumulating interest everyday on your loan. Imagine that you take out a simple interest loan for $10,000.00, with a 10% interest rate. 10% is divided by 365 (number of days in a year), and you get a daily rate of 0.027397. This daily rate is multiplied by your balance to get the interest for the day. Each day until your payment is made, you are paying $2.74 interest. If your payment is received in 31 days, your interest for the month would be $84.94. If you paid your minimum payment of say $100.00, you would have paid only $15.06 toward your principal, the rest is all interest.

Is it any wonder that the CEO's of banks receive so much money in bonuses, vacations, and other perks?

Another way that some loan companies can keep you in the dark, is to not send you statements. With our loan, we received a payment book, much like is received with a mortgage. I faithfully paid my bill every month. At the end of the year we received a tax statement. The tax statement did not tell what was left on the loan, only how much interest we had paid.

One day it dawned on me that I had no clue how much we had paid on our camper. I tried to look up my loan online, and found out there was not online access. Finally, I got a "Real person" on the phone. She said that the company could send a statement once every six months, only if requested. When I got that statement in the mail, I was appalled at how little we had paid against the balance of the loan.

The solution that we have been trying to take with our loan is to make payments on this loan as close together as we can.  I aim for every three weeks.  If I don't make that, I make sure that the payment is still made BEFORE the due date.

Since the interest is accrued daily, time between payments is very important.  Think of the difference in interest between 21 days versus 31 days.

Many people have several "simple interest loans".  What happens if these loans are consolidated?   Better or Worse?  

Pretend that you have three loans.  

1. A $500.00 loan at 15% interest.
2. A $1000.00 loan at 15% interest.
3. A $3000.00 loan at 15% interest.

On the first loan at 15% your daily interest rate would be 16 cents, or $4.96 for the month.  On the second loan your  daily interest would be 33 cents, or $10.23 for the month.  On the third loan your daily interest would be 99 cents or $30.00 for the month.  Your total monthly interest would be $45.19.

Now say that you would like to only pay one bill a month, so you consolidate your three loans into one.  You now have one loan of $4500.  Your daily interest on this amount is $1.48.  Your monthly interest would be $44.10. 

With the interest rate remaining the same, you should be able to consolidate without paying more.  I would do the math myself, and check the loan fine print before consolidating though.

A problem often is that offers contain a promotional rate, and then the interest rate will go up higher than you were originally paying if you do not pay the loan off by a certain date.