How does interest work on a car loan?
I'm not sure how interest works when you finance a car. Can you break it down for me?
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Answered on Mar 08, 2021
Interest on a car loan is an annualized percentage that determines how much money you pay on top of the principal of the loan. Much like with a mortgage, interest on an auto loan goes through an amortization schedule. In simple terms, this just means that you’ll pay more interest at the beginning of your payments. Over time, the amount paid toward interest goes down and more money goes toward the principal.
Typically, an interest rate rises the longer the length of the loan is. For example, you may find that a 60-month loan has an interest rate of three percent, while an 84-month loan has an interest rate of 5.5%. Thus, the shorter the term, the lower the interest rate and the less you’ll pay for the vehicle over the life of the loan.
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