Car Loan Interest Explained (The Easy Way)

I'm Jason with the Honest Finance Channel, and today I want to talk about car loan interest rates. If you just came across this content, give the video a like, and feel free to subscribe to my channel if you want to learn more about financial subjects. Now, on to car loan interest. The interest that you're paying on your car is actually really easy to understand. Car interest rates work the same way as other interest rates. You've just got to understand the payment schedule in order to know more about your car loan than most of us do. If you want to know more about buying a car, check out my other video on the five biggest mistakes of buying a car. This video is just about the interest rates. So let's pretend that you buy a car at your local dealer for $22,000, and after taxes and fees and all that stuff, the total amount ends up costing you $24,000 that you're going to be financing. And let's say that you've got good credit, so you end up with an interest rate of 3%, and you decide that you want to do the loan for 60 months. You're going to be paying $431 a month on that loan for 60 months. Now, how did I get that number? It's really easy. You just have to look up a payment calculator online, plug in a few numbers, and you're done. I'll show you really quick on a loan app on my phone. The app is literally called Loan, and all you do is you just plug in the Now take a look down here at the total interest you're going to be paying on that loan. Looks like you'll pay $1,875 on a 3% loan on that car. That's a lot of money to be spending on interest, and that's a really low rate. Now let's look at the payment schedule. This one's really useful because it's going to break down the amount of money that you're spending on interest and principal on a monthly basis throughout the term of the loan. So from this information, you're going to be paying $371 your first month in principal and $60 in interest. Now look at month 12. You're now paying $382 in principal and $50 in interest. So why are these numbers getting better over time? This is happening because as you pay down the principal on your loan, you don't owe as much on it anymore, and the 3% rate is just charging you interest on what you owe. So as you owe less, you pay less in interest. It's really not very complicated. It's seriously not rocket science. I don't want to overcomplicate things with fancy math formulas. I just want to show you an easy way of figuring out how much interest you're paying on your car loan. This is how I do it, and I do it for all different types of loans. Whether it be a house, a car, a toy, whatever I'm financing, I just plug in these numbers and I can figure out if I can afford it or not. It's a really good idea to know how much you're paying in interest on a loan so that you can figure out how much you can truly afford and how much money and interest you're going to be throwing away. And one more thing, you really want to avoid getting a loan for longer than 60 months. Because generally speaking, an auto loan over 60 months is probably going to cause you to go upside down in your car loan. So what does upside down mean? It's really simple. It just means that you owe more on your car than it's actually worth. So let's say that the car you was only worth $16,000 at the end of two years. Well, if you still owe $18,000 at that same point because you decided to do some stupid 84-month loan, then you're now down $2,000 on that car, meaning you're upside down in your car loan. Also keep in mind that interest rates are typically higher the longer you have the loan for. So if the average 60-month loan is 3%, then an 84-month loan is probably going to be about 5% in interest. So you're going to be paying more in interest for the car and you're more likely to end up upside down in the car too. Please be smarter with your money. You don't have to do what the average person is doing with their car loan. Apparently the average car loan is for 68 months at 4.2% on a loan that's $30,000. So that means that most of us are definitely ending up upside down and we're not following any of these steps. Hopefully you learned something today. I'm Jason with The Honest Finance Channel. Feel free to subscribe if you're into this kind of information, or at least give the video a like. That's all.