Car Loan Amortization: What It Is and How It Works
When buying a car, knowing the structure of your car loan—the interest rate and terms—is important but understanding how you’ll pay it off is just as important.
That’s why understanding car loan amortization and how it works is a must for anyone borrowing money from a bank.
Let’s look at how this loan system works and how you can use it to work for you.
What Is Car Loan Amortization?
Amortization is the process of paying down your loan over time. Each month, you’ll have a portion of your payment applied to the principal and a portion applied to the interest.
The principal is the amount you’ve borrowed to buy your vehicle. Interest is the cost the lender is charging you to borrow the money.
For example, suppose you borrow $20,000 to buy a new car. This would be considered the principal amount.
The interest rate charged by the bank or through dealer financing is the charge for borrowing the money.
With an amortizing loan, the interest is front loaded on the loan. That means at the beginning of the loan term you’ll pay more interest. With the $20,000 loan and an interest rate of 5% for 60 months, your approximate first payment would be $377.42.
The interest you would pay for that month would be $83 and the principal would be reduced by $294.
The following month, the principal amount would be $19,706 because your previous payment reduced the principal by $294.
Using an Amortization Calculator
An amortization calculator is helpful because it shows your balance and the interest paid at any time during the loan. There are some free amortization calculators on the internet like this one.
So why would you want to know how much you’ve paid over the course of your loan? Three possibilities come to mind:
4 Factors That Can Impact a Car Loan Amortization Schedule
There are three big factors that can affect your car loan amortization schedule.
Down Payment—The more you can put down on your loan, the less interest you will pay over the life of the loan.
Interest Rate—The higher the interest rate, the more you’ll pay on your loan. For example, if your principal amount was $27,000 and the interest rate was 15% instead of 10%, over the life of the loan, the interest paid would increase from $7,420.21 to $10,651.49.
Car Loan Term Length—The longer the terms of the loan, the more you will increase the amount of interest you pay.
Your Credit—Good credit is everything! If you have a high score, this is a strong indicator to the lender that you are a good candidate for a loan. And that means getting an excellent interest rate.
Calculating a car loan amortization schedule gives you clarity. You can see exactly how much interest you’re paying over the course of the loan.
The Benefit of Simple Interest Amortization Loans
One of the best benefits of a simple interest amortization loan is the option to pay more on the principal at any time without penalty.
Joe Bowman Auto Plaza only uses a simple interest loan for both new and used car purchases.
The more you can pay on the principal the less interest you’ll pay over the life of the loan, and the quicker you’ll get your car loan paid off!
When you’re ready to buy a new car, truck, or SUV, or any of our quality used cars, turn to Joe Bowman Auto Plaza. We have a wide variety of Carfax preowned vehicles and brand new Chevrolets.
Plus, we offer dealer financing. You’ll find the interest rates for our simple interest loans are highly competitive with flexible terms to meet your budget.
That’s why understanding car loan amortization and how it works is a must for anyone borrowing money from a bank.
Let’s look at how this loan system works and how you can use it to work for you.
What Is Car Loan Amortization?
Amortization is the process of paying down your loan over time. Each month, you’ll have a portion of your payment applied to the principal and a portion applied to the interest.
The principal is the amount you’ve borrowed to buy your vehicle. Interest is the cost the lender is charging you to borrow the money.
For example, suppose you borrow $20,000 to buy a new car. This would be considered the principal amount.
The interest rate charged by the bank or through dealer financing is the charge for borrowing the money.
With an amortizing loan, the interest is front loaded on the loan. That means at the beginning of the loan term you’ll pay more interest. With the $20,000 loan and an interest rate of 5% for 60 months, your approximate first payment would be $377.42.
The interest you would pay for that month would be $83 and the principal would be reduced by $294.
The following month, the principal amount would be $19,706 because your previous payment reduced the principal by $294.
Using an Amortization Calculator
An amortization calculator is helpful because it shows your balance and the interest paid at any time during the loan. There are some free amortization calculators on the internet like this one.
So why would you want to know how much you’ve paid over the course of your loan? Three possibilities come to mind:
- Maybe you’re ready to trade in your vehicle and want to know how much equity you have
- You’re concerned you may be “upside down” on your loan, owing more than the vehicle is worth
- You have extra money and are trying to decide where to spend it for the most effectiveness
4 Factors That Can Impact a Car Loan Amortization Schedule
There are three big factors that can affect your car loan amortization schedule.
Down Payment—The more you can put down on your loan, the less interest you will pay over the life of the loan.
Interest Rate—The higher the interest rate, the more you’ll pay on your loan. For example, if your principal amount was $27,000 and the interest rate was 15% instead of 10%, over the life of the loan, the interest paid would increase from $7,420.21 to $10,651.49.
Car Loan Term Length—The longer the terms of the loan, the more you will increase the amount of interest you pay.
Your Credit—Good credit is everything! If you have a high score, this is a strong indicator to the lender that you are a good candidate for a loan. And that means getting an excellent interest rate.
Calculating a car loan amortization schedule gives you clarity. You can see exactly how much interest you’re paying over the course of the loan.
The Benefit of Simple Interest Amortization Loans
One of the best benefits of a simple interest amortization loan is the option to pay more on the principal at any time without penalty.
Joe Bowman Auto Plaza only uses a simple interest loan for both new and used car purchases.
The more you can pay on the principal the less interest you’ll pay over the life of the loan, and the quicker you’ll get your car loan paid off!
When you’re ready to buy a new car, truck, or SUV, or any of our quality used cars, turn to Joe Bowman Auto Plaza. We have a wide variety of Carfax preowned vehicles and brand new Chevrolets.
Plus, we offer dealer financing. You’ll find the interest rates for our simple interest loans are highly competitive with flexible terms to meet your budget.
