Car Loan Interest Explained (The Easy Way)

I'm Jason with the honest finance Channel and today I want to talk about

car loan interest rates if you just came across this content give the video a

like and feel free to subscribe to my channel if you want to learn more about

financial subjects now on to car loan interest the interest that you're paying

on your car is actually really easy to understand car interest rates work the

same way as other interest rates you've just got to understand the payment

schedule in order to know more about your car loan than most of us do if you

want to know more about buying a car check out my other video on the five

biggest mistakes of buying a car this video is just about the interest rates

so let's pretend that you buy a car at your local dealer for $22,000 and after

taxes and fees and all that stuff the total amount ends up costing you $24,000

that you're gonna be financing and let's say that you've got good credit so you

end up with an interest rate of 3% and you decide that you want to do the loan

for 60 months you're gonna be paying four hundred and thirty one dollars a

month on that loan for sixty months now how did I get that number it's really

easy you just have to look up a payment calculator online plug in a few numbers

and you're done I'll show you really quick on a loan app

on my phone the app is literally called loan and all you do is you just plug in

the numbers twenty four thousand at three percent over sixty months or five

years in the case of this app now take a look down here at the total interest

you're gonna be paying on that loan looks like you'll pay eighteen hundred

and seventy five dollars on a three percent loan on that car that's a lot of

money to be spending on interest and that's a really low rate now let's look

at the payment schedule this one's really useful because it's

gonna break down the amount of money that you're spending on interest and

principal on a monthly basis throughout the term of the loan so from this

information you're gonna be paying three hundred and seventy one dollars your

first month in principle and sixty dollars in interest now look at month

twelve you're now paying three hundred and eighty two dollars in principle and

fifty dollars in interest so why are these numbers getting better over time

this is happening because as you pay down the principal on your loan you

don't owe as much on it anymore and the three percent rate is just charging you

interest on what you owe so as you Oh less you pay less an interest it's

really not very complicated it's seriously not rocket science I don't

want to over complicate things with fancy math formulas I just want to show

you an easy way of figuring out how much interest you're paying on your car loan

this is how I do it and I do it for all different types of loans whether it be a

house a car a toy whatever I'm financing I just plug in

these numbers and I can figure out if I can afford it or not it's a really good

idea to know how much you're paying an interest on a loan so that you can

figure out how much you can truly afford and how much money and interest you're

gonna be throwing away and one more thing you really want to avoid getting a

loan for longer than 60 months because generally speaking an auto loan over 60

months is probably gonna cause you to go upside down in your car loan so what is

upside-down mean it's really simple it just means that you owe more on your car

then it's actually worth so let's say that the car you paid $24,000 for was

only worth $16,000 at the end of two years well if you still owe $18,000 at

that same point because you decided to do some stupid 84 month loan then you're

now down $2,000 on that car meaning you're upside down in your car loan also

keep in mind that interest rates are typically higher the longer you have the

loan for so if the average 60 month loan is 3% then an 84 month loan is probably

going to be about 5% interest so you're gonna be paying more an interest for the

car and you're more likely to end up upside down in the car - please be

smarter with your money you don't have to do what the average person is doing

with their car loan apparently the average car loan is for

68 months at 4.2 percent on a loan that's $30,000 so that means that most

of us are definitely ending up upside down and we're not following any of

these steps hopefully you learned something today I'm Jason with the

honest finance channel feel free to subscribe if you're into this kind of

information or at least give the video alike that's all