HELP! How do car loans work (financing/APR)?

how does car loan interest work

Here is a handy calculator:

The loan amount is compounded (not sure if it's the right term) over the period of the loan. It is not a straight 3% interest at the time of transaction.

Reply With QuoteOldE = Mc2 is offline

That's 3% annual percentage rate (APR). The total amount of the loan is charged 3% interest annually, in theory.

It isn't quite that simple, however. When you take out a loan, you have to repay the amount of the loan, called the 'principal' plus the interest. If your loan is at 3% APR, the interest amount will be 'compounded' on a less than annual basis.

For instance: If your loan is at 3% APR, but compounded monthly, that means that the 3% is divided by 12 months, and then the total remaining principal is charged .25% per month. So, instead of paying a $540 finance charge for the total amount one time, you pay $45 interest the first month, and so on. If your payments are $300 a month, the first month, you pay $240 in principal and

$45 in interest. The next month, $255.60 on the principal, $44.40 in interest. Some loans are compounded weekly, some daily, etc.

Hidden charges: You will have to pay for registration, title fees, bank lien fees, etc. Frequently, these amounts are included in your loan so you don't end up with so much immediate out-of-pocket expenses, but the interest ends up adding to the total over time. IF the dealer is the one financing your car then, like as not, they will not get the interest on the loan. More often than not, they have contracted with a specific lender and they get a portion of the amount as a referral, more or less. The dealer will make their money on any holdback, any amount over what they paid the manufacturer for the car in the first place, and markup on whatever accessories, etc that they sell to you.

I believe that Edmunds has some good info for first time buyers, but I could be wrong. No time to look it up tonight as I really should be in bed already. I have to be at work in 6 hours.


Category: Credit

Similar articles: