One of the main things most people consider when buying a car is how much their monthly payments will be, which is based on various factors to determine their amortization schedule. Hence, understanding amortization and what goes into it can help you better control your loan costs and keep more money in your pocket.
What is Car Loan Amortization?
Car loan amortization is simply the process of paying down the debt for the financing of your vehicle.
The total amount of your car, including the interest, will determine the amortization or the size of equal payments you are required to pay over the life of the loan.
So the lower your total loan cost, the lower your monthly payments and vice versa.
How Does Car Loan Amortization Work?
Amortization is simply a way to equalize your monthly payments over the loan term so that it is more manageable to pay off.
Your amortization schedule is calculated using various factors, including the length of your car loan, the rate you’re charged to borrow the funds, and the total cost of the car minus the down payment.
When paying your monthly car payments, a portion of it will go to paying down the principal, and a portion of it will go towards paying off the interest and fees.
However, when you first begin to repay your loan, the bulk of the payment will go towards the interest when the principal is greater.
And then, as the principal decreases, the amount paid towards interest will also decrease so that over time, the ratio of the principal to the interest paid balances out.
How Are Car Loans Amortized?
Your loan principal, which includes the sticker price, fees, taxes + insurance, and any other addons, is the main factor that affects how your loan will be amortized because it determines the overall cost you will need to borrow and thus the interest rate you will pay.
The higher the interest rate, the more you’ll pay for your loan, and the more your monthly payments will be. However, you can lower the amount of interest and thus the price of your monthly payments by increasing the size of your down payment.
Finally, the lender will also use the length of your car loan term to determine your amortization schedule. The longer the loan term, the more interest you will pay, which will result in higher monthly payments. However, you may consider shortening the length of the loan term for lower interest payments.
According to the experts at Lantern by SoFi, “when you finance a vehicle, the lender…provides you with an auto loan amortization schedule that breaks down for you the total number of payments you’ll make on the loan, the beginning loan balance for each month, and more,” so you are not left in the dark about how your payments are applied.
However, to get a general idea of what your amortization schedule will look like before shopping lenders, you can use an amortization schedule car loan calculator to play around with the numbers and find the best loan rates for you.