What is Car Loan Amortization and Why Should I Care

Amortization is the gradual reduction of a term debt by periodic payments sufficient to pay the current interest and to eliminate the principal at maturity. The amount of periodic payments depends, in part, on the principal, the interest rate and the length of time of the loan.

An amortization schedule is basically a table containing loan details. The beginning of the table shows the amount borrowed, as well as the time period of scheduled payments. The amortization table will then show each payment to be made with the amount that goes towards the principle being deducted from the loan each time. The amortization chart will then show the new balance after each payment.

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There are many websites that offer loan payment schedules using free Excel templates you can download, or online calculators. Most of them you just enter the loan amount, the interest rate, the term of the loan, date of first payment, and the payment frequency. The spreadsheet does all the calculations and then you are able to investigate how making extra payments will affect when you can pay off the loan and the total interest paid. You can also use the same type of car loan amortization calculator to apply to consumer loans and home mortgages.

Here Is Why You Should Car About Care Loan Amortization

When you are talking about purchasing a car, whether new or used, amortization will play an huge part in your loan. Car loans are possibly one of the most popular types of loans in the country and car loan amortization is very important to the process. This is the means by which the car loan is broken into equal payments throughout the life of the loan. You will be able to see the benefits of paying an extra payment towards your car loan. The more payments you make that go toward principal, the less the interest that you will pay because the loan is paid back quicker. Even if you can only make one extra payment per year, that payment goes directly towards principle, allowing you to reduce the amount of interest you pay. And, more importantly, get out of debt that much quicker.

Here is a simplified example of a car loan amortization:

Auto Loan Amount - 15000.00

Auto Loan Term (in months) - 48

Interest Rate - 8%

Auto Loan Start Date - July 10, 2008

Monthly Auto Loan Payment - 366.19

This would apply 266.19 to your loan principal and 100.00 to your interest and your pay off date would be July 10, 2012, with your total interest paid over the life of the loan at 2577.30.

If you only added one extra payment per year, on the anniversary date of the loan, your loan would be paid off 3 months earlier, in April 2012, with your total interest paid over the life of the loan at 2395.64.

Not only can you save money by making that extra payment per the car loan amortization schedule, but an online amortization calculator also helps you shop for car loans. Most car loan companies will offer you a way to calculate amortization that is typical for their company and the amount you are going to borrow. This will be based on your credit score and will show you how much in interest you will be paying over the life of the loan.

This process is also important to the loan provider, as it indicates to them exactly how much interest they can expect to earn each month, as well as when they can expect the loan to be paid in full. Car loan amortization offers companies and consumers the knowledge and security of set payments for the duration of the loan.

Some of the website car loan amortization calculators also offer you a way to quickly calculate lease and loan payments as well as compare the true overall cost of owning versus leasing. This will allow you to determine whether leasing truly is the better option even if the payment amount is significantly lower than borrowing. All in all, car loan amortization plays an important part in your next purchase or lease, depending on your financial situation. The car loan amortization calculator I use is at bankrate.com. It's free and it allows you to enter unlimited variables and see exactly where you can save money.

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