Amortization Schedule

Car Loan Amortization

3 Benefits Of Going Over Your Car Loan Amortization

Car loan amortization may sound scary for most borrowers, but it's not as hard to understand as one might think. The process of paying off a car loan, however, can be a bit more involved than many borrowers realize when they first go into a loan. The amortization details explain why a $10,000 car loan can end costing a whole lot more than a single, onetime 5 percent interest charge.

Amortization is simply the way you pay off a loan. There are many ways you can do that, but it always includes working with the amount you borrow (principal), the interest rate, and how long you have to pay off the loan. The principal is an important number because lenders use it wisely to get as much money as possible out of your bank account. It is also the number that looks static in the early periods of a loan. This works in the lender's favor because you pay interest charges on the outstanding principal amount. So, a 5-year car loan will cost you more than a 3-year loan. You can quickly get these numbers by using loan amortization software.

Most lenders provide a loan amortization chart or graph at closing. What these charts show is nothing more than how the lender will assign each single payment to satisfy the interest charges and reduce the principal amount. The interest adds up to more than many would think. Lenders charge interest yearly or periodically on the remaining balance, so in essence they could charge 5 percent, for example, a few times over.

A car loan amortization schedule runs on a curve that takes place much more quickly than a longer term loan, such as a mortgage. Still, the basic idea is the same. In the early periods of the loan, a greater percentage of installment payment amounts will go to paying interest. This means in the first year or two, the face value of a car loan won't go down all that dramatically. As the principal amount declines slowly, so do the interest charges, as well. You can use the loan amortization to your advantage by taking out a simple interest car loan. Here are some of the benefits:

  • Make extra payments whenever possible. Lenders do not like this, but they will accept extra payments in advance to take away the principal amount quicker.
  • Add on to regular payments. A few dollars added on to each installment payment can reduce the interest paid out and reduce the life of a loan. With a car loan the savings won't be dramatic, but they can add up.
  • Since large payments. You can choose to make large extra payments once or twice during the life of a loan, too. If your agreement doesn't include a "balloon payment", you can simply choose it to reduce total payout and speed up the repayment.
Car loan amortization is nothing more than how a loan repayment process works. You can accept the lender's terms, or you can create an advantage by paying extra when possible. It is your choice.

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