Calculating Your Car Loan Interest

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The cost of purchasing a new vehicle in cash is more than a majority of Americans can manage. Financing at least a portion of your new car is typically the only viable option. The car loan interest rate can vary significantly, depending upon your credit score, term period and down payment amount. This means that a loan with a shorter term incurs less interest if all other factors are equal. Determining your total interest paid over the full loan’s life can be a very eye-opening experience. Let’s take a look at what goes into an interest calculating formula.

The Components of Your Auto Loan

The principal of a car loan primarily consists of the vehicles’s price, although it may include additional costs such as transporting the vehicle, tax, tag and title. Any down payment that the borrower makes is deducted from this total to determine the principal. The term of the loan varies, but is generally within the range of two to five years. Your interest rate is compounded, meaning that the interest on the loan also accrues interest.

Conventional Car Loan

Assume for this example that the principal of the loan is $25,000 and the term of the loan is six years. A conventional car loan requires monthly payments, so this loan will have 72 payments, with an annual interest rate of 6%. The total interest paid over the life of this loan is $10,462!  Bankrate offers a free loan calculator that will not only calculate what your monthly payments will be, but provides an amortization table that will show you just how much of your money is going straight into the lender’s pockets each month, rather than your own.

Bi-weekly Car Loan Payments

A bi-weekly payment schedule typically involves splitting the monthly payment in half and paying that amount every two weeks. A year has 52 weeks, so this payment schedule means the borrower will make 26 half payments in a year, or 13 full payments. A bi-weekly payment schedule therefore makes one additional payment annually, reducing your total interest. Our bi-weekly loan calculator can help you determine how much time and interest you stand to save, just by switching to this payment method. Check with our loan specialists to see what your lender’s rules are regarding bi-weekly loan payments and early loan payoff. The interest savings for you means a loss for the banks, so some will tack on penalties or fees to make up for this loss.

Have you ever considered what you could accomplish with the money you saved? What would you do with the increase in your monthly budget allowance?