Some auto lenders may charge penalties for paying off the loan early, but in all cases, you are debt-free sooner. You can choose a different loan term and possibly qualify for a lower rate, providing an opportunity to adjust your monthly car payment. You might save $25 a month, but over a 48-month term that’s $1,200 back in your pocket.

Bankrate logo

• This means if you had a 72-month car loan with a $15,000 balance at a 10.19% interest rate, securing 5.59% on a car refinance loan would reduce your monthly payment by $126.74.
• Each month, a portion of your car payment goes to the principal and a portion to interest.
• You can also save yourself valuable time and money, and reduce stress.
• If you want to dramatically lower monthly payments, though, you’ll most likely need to extend the loan term.
• Reducing your car loan’s principal will help you pay it off faster, but you should consider both pre-payment penalties and prioritizing paying down other debt with higher interest.
• If you have a car loan with precomputed interest, the interest is precalculated and stays the same even if you make extra payments.

But before writing an extra check or wiring additional funds each month, you should speak with your lender to see if there are any early repayment “gotchas” that you should be aware of. There are many ways to calculate your monthly car loan interest payments. You can do manual calculations or use an online calculator to make the process easier. For either option, you’ll need some information, such as your interest rate, loan term, and principal amount.

How To Calculate Car Loan Interest Payments

Whether you’re taking out a car loan or a mortgage, a significant portion of your first year or two of payments is going to be allocated to interest, and there are a few reasons for this. Making the minimum monthly payment will get you to a debt-free car at the end of the loan’s term, but it’s possible to get out of your loan a few months or years earlier. If you qualify for a car refinance loan, your new lender will request the payoff amount from your existing lender. The payoff amount is what the new lender needs to pay to close out the old loan. Once the balance gets paid off by the new lender, you’ll start making payments on your new loan.

Are Car Loans Amortized Like Mortgages or Are They Simple Interest?

This may only require that you check the paying the principal on a car loan principal-only box when you make a payment online. Two important parts of a simple interest loan are principal and interest. Principal is the amount of money you borrow to purchase the vehicle while interest is the charge paid for borrowing that money. Let’s say you have an outstanding loan balance of $20,000 at a rate of 4%. Lenders determine the interest rate you qualify for after reviewing your finances and credit. 0% APR deals are usually reserved for those with an excellent credit score for a car loan (800 or above).

Why the timing of your payment matters

• The rate you qualify for on a car refinance loan depends on your situation.
• Loan rates tend to be lower during tougher conditions to encourage more people to borrow money.
• You may want to plan for your expenses, and all of your monthly expenditure, to ensure any adjustments to your payment schedule will work.
• That extra $447.50 would be allocated to the balance of your loan, which is the principal.
• Another important point to note is that interest is amortized and front-loaded.
• Pay early, however, and a larger part of the payment will be applied to principal and a smaller part to interest, which may enable you to save and potentially pay off the vehicle quicker.

For example, if you have an auto loan of $20,000 at a 4% interest rate and your term is 36 months, you’ll pay $1,257 in interest over the loan term. If you borrow the same loan for a term of 60 months, you’ll pay $2,100 in interest charges. Typically, credit unions have lower car loan rates compared to banks. You can also get loans from car manufacturers’ finance companies; and if you have excellent credit, you may qualify for special promotions like 0% APR.

If your loan has precomputed interest, the interest will be calculated upfront based on the loan amount. In this case, even if you make extra payments or pay off your car loan early, you won’t save as much in interest. The bottom line is that making principal-only payments help a lot if you want to pay your car loan off earlier, however, you need to make sure that it makes sense for your budget to do so.

How To Use a Car Loan Payoff Calculator To Pay Off Your Debt

This fee can eat into the interest savings you see from making additional payments. However, the process of paying your car off is not as easy as sending a few extra loan payments. First off, the type of interest you have (whether simple or precomputed) matters. This means that the interest rate will remain the same throughout the life of the loan. With variable-rate loans, the interest rate can fluctuate based on the changes to the prime rate. Another important point to note is that interest is amortized and front-loaded.

You are essentially getting closer to paying off the loan and owning the car outright with each additional payment. Our partners cannot pay us to guarantee favorable reviews of their products or services. Set up early payments – Even a single early payment will provide a saving on interest but consider setting up regular early payments to reduce the amount of interest you pay each month.