When you first take out a car loan, you’re likely concerned with what the interest rate is and whether or not you’ll get funded for the full amount that you need. In reality, most people get approved for a loan and write out what seems like endless checks to pay off their loan. If you have an existing car loan, do you know how much of your payment is going towards your principal balance and how much is going towards interest?
What is Car Loan Amortization?
Loan amortization is a term given to the process of paying off a loan balance. It consists of principal and interest amounts. Principal is the total amount of money that you borrowed for the purchase of your vehicle. Interest is the amount of money that you pay for borrowing the money.
How Does Car Loan Amortization Work?
Car loans, just like student loans and mortgages, are termed front-loaded loans. This is because of the way that amortization works to pay off the loan. While you may initially think that a specific amount of each monthly payment goes towards your principal balance, that’s not the case.
Rather, each payment will have predetermined portions that will go towards paying your principal and interest amounts. These loans are termed as front-loaded because the majority of your monthly payment amount goes towards paying interest during the early period of your loan term. During the later years of your term, a higher portion of your payment will go towards paying down the principal amount than interest.
What Factors Impact Auto Loan Amortization?
There are three main factors that will impact the loan amortization schedule on your car loan. These include the total amount you borrow, your interest rate, and the term length that you choose. Realize that the total amount that you borrow is going to include the purchase price, tax, fees, service contracts, and so forth.
The interest is calculated on the total loan amount that you take out. When you opt for a long term length, the interest rate is typically higher than if you opt for a short term length for your auto loan. According to Lantern by SoFi, “The lower the annual percentage rate for cars, the cheaper it is to borrow money.” Ideally, you want to get the lowest interest rate possible.
How Is It Calculated?
Learning how to calculate apr on a car loan to determine your auto loan amortization schedule isn’t overly difficult to do. While you can be extremely specific by utilizing online calculators, tables, and spreadsheets, you don’t have to be. In fact, a simple math formula is all that you need to estimate your loan’s amortization.
Start by multiplying your loan’s interest rate by the outstanding balance of your existing auto loan. Next, divide that amount by 12. This will tell you how much you’ve paid in interest for your car payment. To get the amount you paid towards principal, simply take your total car payment and deduct the interest amount.
Whether you’re looking to take out a car loan or you’re trying to fully understand the one that you have, loan amortization is a big part of it. Understanding the information above can help you to set yourself up for the best chance of getting the ideal auto loan for your situation.
