Car Loan Interest Explained (The Easy Way)

I’m Jason with the honest finance
Channel and today I want to talk about car loan interest rates if you just came
across this content give the video a like and feel free to subscribe to my
channel if you want to learn more about financial subjects now on to car loan
interest 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 if you want to know more about buying a car
check out my other video on the five biggest mistakes of buying a car this
video is just about the interest rates 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 and 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
four hundred and thirty one dollars a month on that loan for sixty months 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
I’ll show you really quick on a loan app on my phone the app is literally called
loan and all you do is you just plug in the numbers twenty four thousand at
three percent over sixty months or five years in the case of this app now take a
look down here at the total interest you’re gonna be paying on that loan
looks like you’ll pay eighteen hundred and seventy five dollars on a three
percent 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 three
hundred and seventy one dollars your first month in principle and sixty
dollars in interest now look at month twelve you’re now paying three hundred
and eighty two dollars in principle and fifty dollars 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
three percent rate is just charging you interest on what you owe so as you Oh
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 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 and one more
thing you really want to avoid 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 percent 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 I’m Jason with the honest finance channel feel free to
subscribe if you’re into this kind of information or at least give the video
alike that’s all

About the Author: Michael Flood

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