Auto loan terms affect the number of payments

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Expensive to drive for dollars,
We are so confused about our car loan. Our outstanding balance is just under $ 11,000 and our monthly payment is just under $ 300. We think we have about 3 years left on our loan, but when I look at the statement online it says we have 50 payments left. It’s been over four years! We always make the monthly payment on time, so we know it’s not because of something that we are doing wrong. Why don’t the outstanding balance and remaining payments match the monthly payment?
– Brandi & Joseph

Dear Brandi & Joseph,
The basic answer to your question concerns the amortization of a loan. For any loan, the monthly payment is made up of the principal (the actual dollar cost of the items you purchase) and the interest associated with the loan. At the start of the loan, you pay less on the principal and more on the interest. Towards the end of the loan, most of your monthly payment goes towards principal and less towards interest. It is depreciation.

But you are probably facing a problem that many consumers face when buying a new car. In an effort to keep the monthly payment lower, lenders are extending longer term loans. This means that you pay more interest over the life of the loan, paying off the principal more slowly than with a shorter loan. And the higher your interest rate, the faster those interest dollars accumulate.

Say, for example, you have a $ 10,000 auto loan with a term of 5 years (60 months). At a 5% interest rate, your payments would be $ 188.71 per month and you would pay $ 1,322.47 in interest over the term of the loan. But if your interest rate is 10%, your monthly payment would be $ 212.47 and you would pay $ 2,748.23 in interest.

The way loans end up being extended for longer terms is when the customer wants to stick to a specific monthly payment and doesn’t realize they’re not entitled to the interest rate they are paying for. expects or the payment he sees advertised on television.

Using our example above, suppose a customer sees an ad for a specific car for a monthly payment of $ 189, but when he arrives at the dealership and goes to close the deal, he is not entitled to this interest rate, so in To obtain this payment, the concessionaire must extend the loan. In this example, the loan would have to be extended for up to 71 months, 11 more months than if the customer qualified for the lower interest rate, to reduce the payment to $ 187.17.

The longer term means he now pays $ 3,288.79 in interest over the life of the loan and pays off the principal at a slower rate. For example, on the 30th month of the loan, he owes $ 5,619.22 with the loan term of 60 months and $ 6,477.63 with the loan term of 71 months.

Unfortunately, the dealership may not explain this to the customer and instead gloss over the terms when going through the paperwork, leaving the customer with a surprise at some point during the loan, much like what you describe.

To see exactly how loan terms and interest rates affect you, go to Bankrate.com’s automatic calculator, enter your loan details, choose “calculate” and then “view amortization schedule”.

RATE RESEARCH: Don’t go and buy a car without first checking bankrate auto loan rates.

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