How to Lower Your Car Payment - InvestopediaAmortization Schedule Calculator
It can take a long time to pay off a car loan.The average term of a car loan is more than five years.Paying down a car loan is not different from paying a mortgage.A large percentage of your initial payments are used to pay interest.You might need a crash course on a concept called amortization if you don't understand why.
It is a fancy way of saying that you are in the process of paying back the money you borrowed from your lender.You have to make a payment every month by the due date.Each payment splits your money between paying off interest and paying your principal balance, which your lender agreed to lend you.
You will soon discover that your car payments cover a bit of interest.That is how it works.Your lender will use a larger share of your car payments to reduce your principal loan balance, and a smaller percentage to pay for interest, until you have paid off the vehicle you purchased.
Some loans amortize.Applying for a credit card is similar to applying for loan.There isn't a date set in advance for when credit card debt has to be paid off.
You are expected to make payments on a regular basis with amortizing loans, like car loans and home loans.When your loan must be paid off is determined by your lender in advance.
Let's talk about interest.You will not be able to borrow money without paying a fee.Simple interest and compound interest are different.
Simple interest is the amount of money that is charged on top of your principal.The fee that accrues on top of your principal balance is known as compound interest.
60-month new car loans have an average rate of 3%.The rates for used cars are close to 4%.
Simple interest rates are the majority of car loans.That is good news for borrowers.If your interest does not compound, you will not have to give your lender more money.You will pay less interest if you pay off your car loan sooner.Refinancing to a shorter loan term and making extra car payments can speed up the process of eliminating your debt.
An amortization schedule is a table that shows the amount of each loan payment that will cover the interest and principal balance.If you agreed to pay back the money you borrowed to buy a car in five years, your auto loan schedule will include all 60 payments that you will need to make.You will see the total amount of paid interest and the principal balance on your car loan after each payment.
As your final payment deadline draws closer, the ratio of what is applied towards interest versus the principal will change, but your car payments will probably stay the same from month to month.You can use an online calculator to view your schedule.If you want to make a schedule for your auto loan, you can use an excel spreadsheet.
If you want to know the percentage of your initial car payment that will pay for your interest, just divide the principal balance by the periodic interest rate.The principal will be calculated by subtracting the interest amount from the total payment amount.
If you have a $25,000 five-year car loan with an annual interest rate of 3%, your first payment would be $449.You will pay $62.50 in interest and reduce your principal balance by $386.50.You can continue your calculations until you get to a point where you don't owe anything, if you have a remaining balance of $24,613.50.