The interest rate the lender charges is a percent of the total amount loaned. Your total amount loaned is called the principal loan amount.
It’s important to remember every car payment you’re making isn’t all going towards your principal amount, but to pay the lender for letting you borrow that money.
Mr. Borrower owes $20,000 on his auto loan with a 10% interest rate. Mr. Borrower’s monthly car payment is $424.94. After five months, Mr. Borrower’s paid $2,124.70 towards his auto loan. But a staggering $811.63 of the $2,124.70 has gone towards paying the lender, bringing Mr. Borrower’s total auto loan amount (principal loan amount) down to only $18,686.93.
If Mr. Borrower has a 60 month loan term, he will pay the lender almost an extra $5,500 on top of the $20,000 he owes. Over the course of one year, Mr. Borrower has paid $1,853.93 in interest costs.
See this breakdown of what every individual auto loan payment costs Mr. Borrower here on this amortization table. This tool is also helpful to see what your auto loan costs you.
Mr. Borrow refinanced his car and dropped his interest rate by 3%. This makes it a 7% interest rate. He saves almost $30 a month on his car payment. He will pay $1290.33 (savings of $563.60) in interest charges over the course of one year and $3761.44 over the entire 60-month loan term.
The interest rate is applied to the total unpaid portion of your loan or bill. It’s important to know what your interest rate is, and how much it adds to your outstanding debt. If your interest rate adds more to your debt than the amount you are paying, your debt could actually increase even though you are making payments.
What are ways to save when you have a high interest rate like Mr. Borrower’s?
Refinance for a lower rate. Services like rateGenius don’t charge you to refinance your auto loan. Also, overpaying on your car payment each month will save you money, because the interest charged each month is only on the principal loan amount.
Have questions about your interest rate? Comment below or call us. 1 866 728 3436.