In this article I want to talk about car loan interest rates. The interest that you’re paying on your car is actually really easy to understand. Car interest rates work the same way as other interest rates. You’ve just got to understand the payment schedule in order to know more about your car loan than most of us do.
So, let’s pretend that you buy a car at your local dealer for $22,000, and after taxes and fees and all that stuff the total amount ends up costing you $24,000 that you’re gonna be financing. Let’s say that you’ve got good credit, so you end up with an interest rate of 3% and you decide that you want to do the loan for 60 months you’re gonna be paying $431 a month on that loan for sixty months.
How To Calculate Your Car Loan Monthly Rate
Now, how did I get that number? It’s really easy you just have to look up a payment calculator online, plug in a few numbers and you’re done. There is an app called loan and all you do is you just plug in the numbers.
You’ll pay $1,874.91 on a 3% loan on that car. That’s a lot of money to be spending on interest, and that’s a really low rate.
Now let’s look at the payment schedule. This one’s really useful because it’s gonna break down the amount of money that you’re spending on interest and principal on a monthly basis throughout the term of the loan. So, from this information you’re gonna be paying $371.25 your first month in principle and $60 in interest. Now, look at month 12. You’re now paying $381.59 in principle and $50 in interest.
So, why are these numbers getting better over time? This is happening because as you pay down the principal on your loan, you don’t owe as much on it anymore and the 3% rate is just charging you interest on what you owe. So as you owe less, you pay less an interest. It’s really not very complicated, it’s seriously not rocket science. I don’t want to over complicate things with fancy math formulas, I just want to show you an easy way of figuring out how much interest you’re paying on your car loan.
This is how I do it and I do it for all different types of loans, whether it be a house, a car, a toy, whatever I’m financing, I just plug in these numbers and I can figure out if I can afford it or not.
Things To Avoid When Getting a Car Loan
It’s a really good idea to know how much you’re paying an interest on a loan so that you can figure out how much you can truly afford and how much money and interest you’re gonna be throwing away. One more thing you really want to avoid is getting a loan for longer than 60 months, because generally speaking an auto loan over 60 months is probably gonna cause you to go upside down in your car loan. So, what is upside-down mean? It’s really simple, it just means that you owe more on your car then it’s actually worth.
So, let’s say that the car you paid $24,000 for was only worth $16,000 at the end of two years. Well, if you still owe $18,000 at that same point because you decided to do some stupid 84 month loan, then you’re now down $2,000 on that car, meaning you’re upside down in your car loan. Also keep in mind that interest rates are typically higher the longer you have the loan for. So, if the average 60 month loan is 3% then an 84 month loan is probably going to be about 5% interest. So, you’re gonna be paying more an interest for the car and you’re more likely to end up upside down in the car. Please be smarter with your money. You don’t have to do what the average person is doing with their car loan. Apparently the average car loan is for 68 months at 4.2% on a loan. That’s $30,000, so that means that most of us are definitely ending up upside down and we’re not following any of these steps.
Hopefully you learned something today. Feel free to leave a comment and share your experience.