What is Car Loan Amortization?
According to Lantern by SoFi, “Auto loan amortization simply means the process of paying off a vehicle loan.” Amortization is the schedule that explains how the various loan payments are going to be applied over time. With every car loan, there are going to be two main expenses. These include the total cost of the vehicle and the interest you pay the lender for using their money. Car amortization helps to determine how much of each monthly car payment goes towards your principal balance and towards interest expenses.
How Does Car Loan AmorWhen it’s time for you to upgrade your existing vehicle, it’s highly unlikely that you have the available funds to purchase a new car outright. For this reason, most people opt for using a car loan to pay for their new or used car purchase over a period of years. If you’re not overly familiar with car loans, it’s time to learn more about them to ensure that you get the best loan possible for your individual situation.
Unfortunately, many borrowers are under the false assumption that each loan payment has a set amount that is applied toward interest and the remainder towards their principal balance. Amortization loans, like car loans, mortgage loans, and student loans, are considered front-loaded.
This means that during the early years of your car loan, a higher percentage of your monthly car payments will go towards paying interest. During the later years of your loan, a higher percentage of your monthly payment goes towards the principal balance.
When you go to take out a vehicle loan, your lender will provide you with a loan amortization schedule. This includes imperative information about your loan, including the number of payments you’ll need to make, the beginning loan balance, what portion of your payment goes towards interest, and what portion goes towards the principal balance for every payment that you make.
Why You Should Care
Before you ever sign on the dotted line to take out a vehicle loan, it’s crucial that you understand the terms associated with it. You need a car loan that fits comfortably within your budget and doesn’t take forever to pay off. By understanding what car amortization is, you can better assess a potential loan to determine if it’s right for your individual situation.
When you start to care about the specifics of your loan, like the amortization schedule, you can help to alter the factors that go into your loan for the better. For example, you can work on raising your credit score to secure a lower interest rate on your auto loan. Or, you could opt for putting down a larger down payment to reduce your interest rate and your payoff period.
When it comes to financing a vehicle, you want to secure the best loan term possible. Understanding car loan amortization is an absolute necessity in order to get the terms that you desire on your next auto loan.