Simply put, car loan amortization is the total repayment of your car loan over time. It’s calculated by dividing the loan amount by the number of months in the loan agreement.

This results in a specific amount that is due each month. Car loan amortization also includes interest and any fees, so the total cost of the loan will be higher than the principal amount. Auto loans can include simple interest or precomputed interest, depending on which type of loan you’ve agreed to with your lender (you can always ask them if you’re not sure).

Your monthly payment is determined based on the total loan amount, interest rate and term of the loan. But you might not realize that within that payment, a portion is applied toward both the principal (the borrowed amount) and the interest.

Amortization schedules can be confusing, but understanding how they work can save you money on your car loan. Here’s a quick overview of what they are and how to make them work for you.

Principal and Interest

The initial amount of money you borrowed is called the principal. The interest is what a lender charges you to borrow the money, plus any additional fees. Your monthly payment is divided between these two things based on an amortization schedule.

The amount of interest charged is based on the interest rate, which is set by the lender. There are generally industry trends for finance rates that can be easily tracked.

The greater the interest rate, the more you’ll pay in interest throughout the term of the loan. This is why it’s essential to secure the best auto loan financing possible for your credit score and situation, including a low interest rate.

Amortization Schedule

The amortization schedule is a table that shows how much of each payment goes toward the principal and how much goes toward the interest. In the early years of your loan, most of your payment will go toward paying off the interest. But as you get closer to the end of your loan term, more and more of your payment will go toward the principal.

Paying extra toward the principal can save you money in interest charges and help you pay off your loan faster. If you want to do this, just let your lender know how much extra you want to pay each month and they’ll apply it to your loan accordingly.

Short- and Long-Term Car Loan Amortization

It’s good to understand that you can select the term length for your car loan. The most common are 36, 48 or 60 months. However, some companies offer loans lasting as little as 12 months, although others extend as far as 84 months.

Choosing a shorter loan term will result in higher monthly payments, meaning you won’t be able to afford the same car as you would with a longer loan. But it also means you’ll pay less interest and pay off your loan faster.

A longer loan term will lower monthly payments, allowing you to afford a more expensive car. But you’ll also pay more interest over time, and it will take longer to repay your loan.

This is a decision that each borrower will have to make based on their budget and financial goals.

Changing Circumstances

Many people choose to use long-term loans because they lower monthly payments. But what happens if your circumstances change and you can afford to pay off your vehicle loan more quickly, or you simply want to get rid of it as soon as possible?

If you find yourself in this situation, you can always make additional payments toward your loan’s principal. This will reduce the interest you pay over time and help you repay your loan faster. Just be sure to check with your lender first to make sure there are no prepayment penalties.

Here are some common ways people pay off their car loans early:

• Refinance – You can refinance your car loan to get a lower interest rate, saving you money over time. You can also choose to extend or shorten the term of your loan, depending on your current needs. Use a refinance car loan calculator to determine how much you could save.
• Make a lump-sum payment – If you come into some extra money, you can make a one-time payment toward your loan’s principal. This will reduce the interest you pay over time and help you pay off your loan faster.
• Pay extra each month – You can also choose to make slightly larger payments each month, which will go toward the principal of your loan. Just be sure to let your lender know that you want the extra payment to go toward the principal — not the interest.

You might not ever need to use any of these, but it helps to be aware of them in case you end up in a situation where you need to pay off your car loan faster.

How Understanding Car Loan Amortization Can Help

Car loan amortization is the process of repaying your car loan over time. The amount you owe each month is divided between the principal and the interest, and the schedule is set by the lender. You can choose a shorter or longer loan term, depending on what you can afford.

Understanding how car loan amortization works can help you save money and repay your loan faster. Be sure to ask your lender about their amortization schedule so that you can make the most informed decision possible.