used car is a big job. There are countless
styles to choose from. Problem is, many people put all of
their attentions into choosing a car, and don’t even consider
shopping around for a car loan.
Calculating car loans is an important step in borrowing the
money you need to purchase a car. This is because a car loan
calculation allows you to estimate the monthly payments
required to own the car, before you make the final purchase.
There are many factors to consider in calculating car loans.
There are three very important questions that you must be able
to answer:
- What is the interest rate?
- What is the loan period?
- What is the loan principal?
A qualified lender will happily provide you the answers you
need. This information may also be available online. Once you
have the answers you need, you can then begin calculating car
loans to help you make the final decision. Your car loan
calculations will allow you to estimate your total costs, and
confirm how much you’re able to afford based on your income.
To fully understand these calculations, you need to know what
all of the financial terms mean.
Interest Rate
The interest rate is generally expressed as a percentage. This
is the amount of money paid on top of the initial amount
borrowed. It’s considered to be the cost of financing. Let’s
say you borrow $10,000 to buy a car, but at the end of the term
you’ve actually paid $18,000 in monthly payments. The extra
$8,000 is the interest, and it’s calculated to reflect the
current interest rate. Rates do fluctuate, so shop around to
get the best deal.
Loan Period
This is the “life cycle” of the loan. It’s the length of time
that the borrower has agreed to take to repay the loan. Most
car loans are for periods of two, three or four years. The
principal and interest payments are spaced equally throughout
the loan period.
Loan Principal
When calculating car loans, the loan principal is the amount of
money originally borrowed. Loan principal is a term used in
finance that refers to the original amount of the debt, before
additional fees or interest. Your total interest charges at
the end of the loan period will depend upon the amount of the
loan principal, as well as the loan period. With this in mind,
it’s easy to see that the loan principal is the foundation of
calculating car loans. In some cases, the loan principal is
used to refer to the amount of money owing, after the debt has
been partially paid. In other words, it’s the outstanding
balance. With each monthly payment, this amount slowly and
steadily decreases, until eventually the entire balance is paid
off.
Don’t be surprised if you check on the principal balance after
a few months, and find that it’s barely been touched. That’s
because your first few months of car loan payments cover mostly
interest, and very little principle. Only a small percentage is
used to pay off the balance. This repayment plan is common in
amortization loans. After these initial months, your monthly
payments will be divided in half, with equal amounts going to
pay off the interest and reduce the principal. This trend
continues until the remaining principal balance has been paid.
Buying a car takes a lot of research and smart decision-making;
and choosing automotive financing should too. Calculating car
loans is essential to arranging financial assistance that you
can afford, and making your dream of car ownership a reality.
About The Author: William Moore writes for several online
magazines, especially http://kytol.com and http://rucor.com
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