Make a spreadsheet in Excel.

You'll see that it starts out as almost all interest, and ends up as all principal at the end of 5 years.

Want it to go down faster? Pay more per month.

 

The amortization process of automobile loans mean you WILL be paying more interest in the early stages of the loan. My suggestion would be to pay a little more each month. Any extra you pay over the minimum month payment will go towards the principal only and not the interest. Principal = loan balance. Make sure you do this especially in the early stages of your loan, the first couple years.

For example...

If you have a 30,000 loan for 72 months at 8% interest, your monthly payment would be $526.00

Month 1 you would have paid $326 towards principal and $200 towards interest.

Month 60 you would have paid $482.47 towards principal and $43.53 towards interest.

Another example...

If you pay an additional $74 per month for a total of $600, you would pay down the loan in 62 months instead of 72 months.

 

There is a shark loan using rule of 78.

Stay away from it, as you pre-pay interest on the loan. If you pay-off the loan early, you will have pre-paid interest on money that you have returned.

Simple interest loans are what you want.

Interest rate/12*loan balance = monthly interest component.

Ex.
22,000 loan balance
5.5% rate

interest component = (.055/12) * 22,000 = $100.83

If this was the 1st payment of a 4 year amort, your payment would be $511.64 of which, $100.83 is interest.

After paying for 1 year, your payment is still $511.64, but your interest is only $73.67...and so on.

Any extra amount over the monthly payment that you contribute goes directly against principal.

Under Rule of 78 in the same example above, your first payment will have you paying $104.44 in interest and your 13th payment will have you paying $78.33.

IF you do not payoff the loan early, you will pay the same amount for either loan during the 4 years. However, if you do payoff early (trade, etc) under Rule of 78, you will have less principal paid off on the car.

SIDE NOTE:
In 1992 the U.S. government made using the Rule of 78's illegal for closed-end consumer loans longer than 61 months. Kansas, along with 15 other states, has made the practice illegal in closed-end consumer loans with a loan term of 60 months or less.

 

Depends on the loan agreement. Take a look at the original loan paperwork you signed, that will tell you how the payments work.
A traditional loan is usually the same amount of principle and interest each month. But if you are a high risk the bank may want to take more of their cut in the early part of your agreement. Resulting in more interest at the beginning and less at the end.
So review your paperwork, it tells all.

 

I'm starting to wonder if we're really helping him or confusing him more with finance stuff.

 

I guess no one learns the basics of borrowing money before borrowing money...

Anyway, the higher the principal, the higher the interest, the greater % of your payment goes to interest. As your principal goes down over time, the less interest each payment has to cover so more goes to principal.

It isn't that the principal doesn't go down at all the first few years, but it can look that way.

 

I actually work at a bank and got a loan thru them...

i have a 4.9 interest rate....i'm sure thats one of the lowest on this thread


You pay both the principal and the interest at the same time.

But if you decide to throw in some earlier payments.....the interest decreases, indirectly forcing you to pay LESS on the entire loan.

Banks are fun......so are these guys

 

Your interest also decreases as a result to all I just said......even if u don't decide to throw in some earlier payments..


Your interest will be decreasing as well throughout the whole process due to the fact that your principal will evidently be decreasing ....

hope that helps ya out

 

^^this is where i was heading

 

ok thanks ya'll! I understand better now.