Car Loan Interest In A Nutshell
Car loan interest works the same way an installment loan with a fixed rate does. Because that’s exactly what a car loan is, it’s just a loan where you set the contract to a certain amount of time, and the interest rate. Then you just pay monthly until the loan is paid off. If you’ve got a conventional mortgage or a personal loan those all work pretty much the same way too. Just make sure that your loan always has a fixed rate, not a variable one. Because a fixed rate loan is always going to stay the same, and your monthly payment.
Variable Rate
Now, if you have a variable rate that can actually change your monthly payment, which can be unexpected. The last thing you want to happen is getting comfortable with $350 a month, then all of sudden it goes up to $450 a month, because your rate changed. Car loan interest can cost you a lot, or it can actually be fair. It just depends on how you set the loan up. If you do some research you’ll probably find that an average new car loan is in the $30,000 range, and a used car is in the $20,000 range. The interest rate is about 7%, and the average term is over 5 years, which is long in my opinion.
Lets say you have a car loan for $28,000 with an interest rate of 7%, and you want to know how much you’re going to be paying. All you have to do is put $28,000 in your calculator and times it by 7%, which is .07 in your calculator. According to this calculation you’re going to end up paying $1,960 in interest per year. If you want to figure out how much interest you’re going to be paying per month, just take $1,960 and divide it by 12, which is $163.33 per month. This is a quick way to figure out how much interest you’re going to be paying, but it’s not completely accurate, because as you make your monthly payments some of your money is going towards the principal and some of the money is going towards interest.
Extra Monthly Payments
If you can make extra payments towards your balance every month that would be good, because you’re going to end up paying off your loan faster, and pay less in interest. I think the easiest way to pay extra on your car loan is to round up your monthly payment, because you’re not going to notice it as much. For example, if your monthly payment is $450 round it up to $500 a month, it’s not going to damage your budget.
Understand How Monthly Payments Work
Another thing don’t just focus on the monthly car payment. This is a bad mindset to have. Now, the monthly payment does matter, because you can only afford to pay so much monthly. But you got to keep in mind the length of the loan can determine your monthly payment, and this can be a good thing or a bad thing. For example, if you couldn’t afford a certain monthly amount, the car salesman could just extend the loan. Now, this would lower the monthly payment, but it’s a rip-off, because your going to pay more in interest on a depreciating car. So, if you’re not paying down the loan fast enough, you’ll owe more than the car is actually worth.
