What Does Per Diem Mean on a Car Loan? Understand Daily Interest Rates
When we ask, “what does per diem mean on a car loan,” we’re referring to the daily interest that’s accruing on the loan. Yes, daily. Unlike the more familiar monthly interest rates, per diem interest accumulates every single day.
Why Does Per Diem Matter?
You might wonder why this tiny, daily interest is significant. It comes into play mainly when you’re dealing with the timing of your payments. Let’s say you decide to pay off your loan early or there’s a delay in your loan payoff. Knowing how much interest you’re accruing daily can give you a precise idea of how much you owe.
Calculating Per Diem Interest
Here’s where it gets a bit mathematical, but stay with me. To calculate your per diem interest, you take your annual interest rate and divide it by 365 (or 366 in a leap year). So, if your loan has a 5% annual interest rate, your per diem rate would be approximately 0.0137%.
Here’s a quick example:
- Annual Interest Rate: 5%
- Loan Amount: $20,000
- Daily Interest Rate: 0.05 / 365 = 0.000137
- Per Diem Interest: $20,000 * 0.000137 ≈ $2.74
So, each day, you’re adding about $2.74 to your loan balance in interest.
The Real-World Impact
Imagine you’re in the process of selling your car and paying off the loan. The payoff amount provided by your lender is good for a few days, but the exact day you pay it off matters because of the per diem interest. If you’re a few days late, you’ll owe more due to the accumulated daily interest. Conversely, paying a bit early could save you some bucks.
Per Diem and Refinancing
If you decide to refinance your car loan, per diem interest becomes a focal point once again. During the refinancing process, there might be a few days when the old loan is paid off but the new one hasn’t kicked in yet. Understanding per diem interest helps you ensure that you’re not overpaying or underpaying during this transition.
Tips to Manage Per Diem Interest
- Keep Track of Payoff Dates: Always be aware of the exact date your payoff amount is calculated for. Pay it off as close to this date as possible to avoid extra charges.
- Communicate with Your Lender: Stay in touch with your lender to understand how they calculate per diem interest and ensure you have the most accurate payoff information.
- Refinance Smartly: If you’re refinancing, coordinate the payoff and new loan start dates to minimize per diem interest charges.
Final Thoughts
So, what does per diem mean on a car loan? It might seem like a minor detail in the grand scheme of auto financing, but it’s a detail that can cost or save you money. By understanding how it works, you’re better equipped to manage your loan and avoid any unexpected charges. Always stay informed and proactive, especially when dealing with financial matters. Knowledge is power, and in this case, it can also be a money saver.
