Car Loan Amortization Schedule: How Does It Work?

Shutterstock

Paying off a car loan can take a while. Currently, the most common car loans are spread out over 72 to 84 months. The longer the loan terms, the more interest you end up paying. That's where a car loan amortization schedule can come in handy.

Whether you are planning to purchase a car or finance an existing loan, a car loan amortization schedule or calculator can help you estimate your monthly payment and predict how soon the car loan will be paid off.

What Is Car Loan Amortization?

A car loan is made up of two components: principal and interest. The principal is the amount the lender agreed to lend to you, while the interest is the annual percentage rate (APR) you pay in exchange for borrowing the money.

Each loan payment is split between paying off the principal and the interest. However, it's not an even split. The amount of each payment that goes toward the principal or balance changes over time in a process called amortization. 

In the beginning, the majority of the payment will go toward interest. Over time, more of the loan payment goes toward paying down the loan balance. As the amount of money you owe on the loan decreases, so does the amount of interest you'll have to pay.

What Variables Impact the Amortization Schedule?

While individual financial situations may vary, there are a few different factors that can affect amortization schedules:

• Principal amount: This is the amount of the loan. You can lower the overall purchase price of the car by increasing your down payment, using a trade-in, or taking advantage of dealer or manufacturer incentives.

• Interest rate: This is the APR for your loan. The majority of car loans have simple interest rates, which means the amount of interest is based only on the loan's principal balance. It's also important to note that a buyer's credit score can impact the rates lenders offer. A low credit score often means a higher APR.

• Loan term: This is the number of months or years you'll be paying back the loan. Most lenders offer 36-, 48-, 60-, 72- and even 84-month periods. As a general rule, the longer the term, the higher the interest rate.

To figure out how much of your payment goes toward interest in a single month, multiply your loan's interest rate by your outstanding loan balance and divide by 12. Subtract that interest amount from the total payment amount to calculate the amount going toward the principal.

How to Make Amortization Work for You

Car buyers can use the amortization schedule to plan their car budget in the long term. By adjusting the principal amount, interest rate, or loan term, a buyer can change the other variables.

For example, if you took out a car loan of $25,000 and paid it back over five years at a 4% annual interest rate, you'd have a monthly payment of $460.41 and you would pay a total of $2,624.78 in interest. However, if you paid off the loan over 48 months instead of 60 at the same APR, you'd have a higher monthly payment ($564.48) but you would pay a total of $2,094.86 in interest, or $529.92 less.

Using that same car loan amount, let's say you have a lender offering a 3.5% interest rate over the same 48-month loan period. The monthly payment would be slightly less at $558.90, as would the total amount of interest paid at $1,827.23, an additional savings of $267.63 over the loan with a 4% rate.

Additionally, if you put down a $2,000 down payment to lower the principal on the loan to $23,000, with a 48-month loan period and an interest rate of 3.5%, your monthly payment would go down to $514.19 and the total interest paid would be $1,680.99.

Understanding car loan amortization and how the different variables impact each other can help car buyers compare financing options and make smart choices, helping them spend less money on interest and pay off their loans faster. There are a number of online car loan amortization schedules out there to crunch the numbers for you, including this one from capital one.