Car Loan Amortization & Why You Should Care

Car Loan Amortization & Why You Should Care

Posted on March 17, 2021

If you’re researching Burford auto loans and come across the term ‘amortization’ you won’t be alone if you don’t understand it. We see this question come up all the time in the office. That makes it a prime candidate for a blog post!

Our Burford auto loan team explains what amortization is and what it means for you.

Burford car loan amortization

Amortization is an accounting technique used to calculate a loan over the given term. It’s what is used in the majority of simple interest auto loans and something it pays to know a little about before you sign.

For example, if you borrow $35,000 over 5 years, the lender would use amortization to calculate how much interest and how much of the principal, the amount you borrowed, you would pay each month.

Most simple interest loans are front loaded. This means you’ll pay a higher amount in interest than principal for the first year or two to guarantee a return for the lender. Then, over time, that evens out so you’re paying a standard amount of interest and principal each month.

If your auto loan comes with fees, these are usually included in the monthly payment and also front loaded.

The amortization schedule

The amortization schedule is a breakdown of how an auto loan payment is broken down over the years of the loan. As loans are front loaded, you will pay more interest at the beginning than at the end and there will be a gradual evening out over the term.

For a five year auto loan, the first year would include perhaps four or five times the amount of interest than the final year and gradually reduce until you’re paying minimal interest in the final year or two.

As mentioned, this is to make sure the lender gets their cut.

You are still paying off the amount borrowed but it will be a lower percentage at first before it increases over time.

Amortization is one of the reasons many new car loans are underwater for the first year or so. Because you’re paying off more interest than principal.

Calculating car loan amortization

Many online auto loan calculators can help you with the amortization schedule. When you set the amount, the interest and the term, they can present a table showing the amount of interest and the amount of principal for each year of the loan.

If you check, you’ll see you’re paying a much higher amount of interest in years one and two before it reduces for the following years. While it may seem unfair, this is how all simple interest auto loans work.

It’s also how mortgages, personal loans and business loans work too.

For the majority of borrowers, amortization and the schedule don’t matter. If you’re going to be paying the loan over the term and won’t be selling the car early, it really doesn’t matter.

It only matters if you plan to overpay, settle early or plan to change the loan during the term. Then the different in interest and principal become more important.

Contact Unique Chrysler for help, advice and competitive Burford car finance and leasing.

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