What Is a Per Diem Car Loan and How Does It Work?
Learn about per diem car loans, a unique financing structure where interest accrues daily. Understand its implications for your auto loan.
A per diem car loan is a financing arrangement where interest on the borrowed amount is calculated on a daily basis. The term “per diem” means “per day,” indicating that interest charges accrue each day the loan balance remains outstanding. This approach differs from traditional loan structures that might calculate interest solely on a monthly cycle or an annual percentage rate applied to a fixed monthly balance.
Understanding Per Diem in Car Financing
In car financing, the concept of “per diem” signifies that interest accumulates every single day on the outstanding principal balance of the loan. Unlike loans where interest might be calculated only at the end of a billing cycle, a per diem structure means the interest clock is always running.
As the borrower makes payments, the principal balance decreases, which in turn reduces the amount of interest accruing each subsequent day. A simple interest loan, common in auto financing, is typically a per diem loan where interest is calculated daily.
Calculating Daily Interest on Car Loans
Calculating daily interest on a car loan involves a straightforward process based on the annual interest rate and the current loan balance. First, convert the annual interest rate into a decimal by dividing it by 100. Then, divide this decimal rate by 365 to determine the daily interest rate. Finally, multiply this daily rate by the current outstanding principal balance of the loan to find the daily interest amount.
For example, a $10,000 loan with a 9% annual interest rate would have a daily interest charge of approximately $2.47 ($10,000 0.09 / 365). While interest is calculated daily, most payment schedules for car loans remain monthly.
Common Applications of Per Diem Car Loan Structures
Per diem car loan structures are frequently encountered in several specific financing scenarios. They are common with simple interest auto loans, where interest is continually calculated on the reducing principal balance. This structure is beneficial when borrowers aim to pay off their loan ahead of schedule. Making extra payments or paying more frequently, like bi-weekly, directly reduces the principal faster and thus the total interest accrued daily.
These daily interest calculations are also relevant in situations involving short-term financing needs or when a borrower intends to pay off a loan very quickly, such as through refinancing. Daily interest allows for interest savings when the principal is reduced outside of regular payment cycles. This structure allows borrowers to see immediate benefits from any additional principal payments they make.