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How does interest work on a car loan?
How do you calculate interest on a car loan? I've been doing some research to try to figure out what kinds of cars I can afford, but loans are confusing. I'm not really sure how car loan interest works when you finance a car.
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
“Interest on a car loan is an annualized percentage (it grows every year) that determines how much money you pay on top of the principal (the lump sum).
Similar to a mortgage, interest on an auto loan usually goes through an amortization schedule, which means you’ll pay more interest at the beginning of your loan term. As you pay off the loan, the amount of money going toward interest decreases, and the amount going to the principal increases.
Typically, long-term loans will have higher interest rates than short-term loans. For example, a 60-month loan might have an interest rate of 3%, while an
84-month loan
could have an interest rate of 5.5%.However, neither loan is necessarily better than the other. While they tend to have lower interest rates, short-term loans mean higher monthly payments that tie up your money until the loan is paid off. Alternatively, long-term loans have lower monthly payments despite higher interest rates.
Finding an inexpensive loan can be difficult, but there are plenty of other ways to save money on your car! Start by using
Jerry
to make sure you have great insurance—without overpaying. Jerry gathers competitive quotes from top name-brand insurance companies and delivers low-cost rates directly to your phone for free.”View full answer
- Gregory R.
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