Q. What’s the difference between a simple interest car loan and an add-on car loan? If the stated interest was 18% would the total amount of interest be the same over the life of the loan?

A. Most car loans are simple interest loans. You make the same payment each month, with part of the money paying the interest and part paying back the principal you borrowed. During the first 14 months of a 60-month loan, you will pay more interest than principal each month, but then it will shift and more of your payment will go toward principal.  But the key thing about simple interest loans is that you only pay interest on the balance, which is constantly being reduced. And there's usually no penalty for paying the loan off early. 

The interest rate you ask about -- 18% -- is very high. Are you sure you can't do better than that? The average rate for a new car loan according to our most recent survey of major lenders is 7.8%. 

But if you borrowed $20,000 for 60 months at 18% a year, your monthly payment would be $508 and your total interest over the life of the loan would be $10,472. If you go to our auto loan calculator you can see how much your payments would be for any amount, rate and length of loan.

Add-on loans are more costly than simple interest loans. They require you to pay interest on the full amount of the loan for the entire loan period.  That interest is "added on"  to the principal and the sum divided into an equal number of monthly payments. If it's a 5-year loan for example, then the total would be divided by 60. Some of that interest is refunded if you pay the loan off early. But lenders often keep 20% of that refund as a prepayment penalty.

If you borrowed $20,000 for 60 months at 18% with an add-on loan, your monthly payment would be $633 and you'd pay a total of $18,000 in interest.
 
We suggest you check our rate comparison chart to find another lender and always go with a simple loan, not an add-on loan. 

Q. What’s the difference between a co-signed and a joint auto loan?

A. When you co-sign for a loan, you’re legally responsible for making the payments if the person taking out the loan defaults. But a co-signer has no ownership rights to the vehicle. Your name is not on the title and you can’t seize it or demand any insurance payments if it’s wrecked -- even if you are making the payments.

That makes co-signing a risky proposition.

A joint application allows you to apply for the loan as an equal owner of the vehicle. While you’re still responsible for the payments, your name is on the title. You have equal rights to the car’s use and any insurance checks.

Bottom line: If you want to help someone buy a car, insist on a joint loan.

Have a question about your finances? Ask us at editors@interest.com.

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