Your monthly payment and the amount of interest you pay will also be affected by your loan term. A longer loan term may result in a lower monthly repayment. Your total vehicle cost will increase because the lender has more time to collect the interest. The interest rate you get could be affected by the length of your loan.
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Let’s say you take out $30,000 at a 5% rate. Below is an example of how the monthly payments and total interest would vary between a 60-month and 48-month loan.
What the down payment does to your loan?
Although it is possible to obtain a car loan without putting down any money, this option is usually reserved for buyers who have good credit. You won’t need to pay cash upfront for the vehicle. The lender must agree that taxes, fees and extended warranties costs (if any) will be included in the loan balance.
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It’s a good idea even if the lender does not require a downpayment. You’ll have a lower monthly payment, a lower interest rate, and owe less over the term of your loan. You may be offered a lower interest rate by some lenders if you pay more down. This will save you money over the long-term.
How amortization works on a car loan?
Auto loans are usually fully amortizing. This means that you can make all your monthly payments according to the original loan schedule. The principal and interest will be paid off at the end of the loan term.
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A larger portion of your monthly car payment will be used to pay interest at the beginning of the loan. The principal balance will not decrease until you have had the loan for a while. As you pay down the principal, and as interest is repaid, a greater portion of your monthly payment will be credited to the principal balance.
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The car’s value decreases as it ages. If you get rid of your vehicle before the end of the loan term, you may find yourself with negative equity. It means that you owe more on your car than it is worth. This can make it difficult to sell the vehicle or trade it in, without paying out of pocket. If you haven’t paid down any money when you bought the car or if your loan term is longer, negative equity will be more of a problem.
