Deciding on a new or used car is a big decision. There are numerous products to decide from. The dilemma is many people look into choosing a car, and don't even consider shopping around for a car loan.
Calculating car loans is a vital step in borrowing the money you will need to obtain a car. Since a car loan calculation allows you to estimate the monthly payments required to own the car, before you make the final purchase.
There are many factors to consider in calculating car loans. There are three very important questions that you must be able to answer:
- What is the interest rate?
- What is the loan period?
- What is the loan principal?
A qualified lender will willingly provide you the answers you need. Once you have the answers you need, you can then begin calculating car loans to help you make the final decision. Your car loan calculations will allow you to estimate your total costs, and confirm how much you're able to afford based on your income. To fully understand these calculations, you need to know what all of the financial terms mean. This information may also be available online.
Interest Rate
The interest rate is generally expressed as a percentage. This is the amount of money paid on top of the initial amount borrowed. It's considered to be the cost of financing. Let's say you borrow $10,000 to buy a car, but at the end of the term you've actually paid $18,000 in monthly payments. The extra $8,000 is the interest, and it's calculated to reflect the current interest rate. Rates do fluctuate, so shop around to get the best deal.
Loan Period
Generally car loans can be for periods of two, three or four years. This is the "life cycle" of the loan. It's the length of time that the borrower has to pay back a loan. The interest payments and the principal are spaced equally through the loan period.
Loan Principal
When purchasing a vehicle it takes time and a lot of stress; you have to find a payment plan that best suits your needs to be able drive your car of your dreams.
The loan principal is the amount of money originally borrowed when calculating car loans. Loan principal is a term used in finance that refers to the original amount of the debt, before additional fees or interest. Your total interest charges at the end of the loan period will depend upon the amount of the loan principal, as well as the loan period. With this in mind, it's easy to see that the loan principal is the foundation of calculating car loans. In some cases, the loan principal is used to refer to the amount of money owing, after the debt has been partially paid. In other words, it's the outstanding balance. With each monthly payment, this amount slowly and steadily decreases, until eventually the entire balance is paid off.
If you were to verify the principal balance after a few a period of time you will find that it's hardly been touched. The first few months of car loan payments cover generally interest, and very little principle. Only a small amount is normally used to pay off the balance. This repayment plan is likely in amortization loans. After a few months your monthly payments will be divided in half, with equal amounts going to pay off the interest and reduce the principal. This will continue until the outstanding principal balance has been paid.
Use our FREE car loan calculator to help calculate your next car loan.
