How Car Loan Interest Works (The Truth)


if you don’t understand how the
interest works on your car loan then you’re always gonna spend way more money
than you need to and that’s not something to be proud of I get a lot of
questions asking how car interest works so in this video I’m gonna cover the
basics so that you guys can at least understand how the math works and then
what I really want you to do is just pass it on to somebody else so that they
can learn the same information that I’m gonna pass on to you
I made a car interest video on this channel a while back but I really just
wanted to give it an update and that’s why I’m making this one so that I can
hone in on the basics and so that you guys can learn something new and pass it
on to someone else like I said earlier now if you just found this channel I’m
Jason with honest finance and I make a lot of videos on different topics that
will give your life and your finances more value so definitely subscribe if
you’re into that type of content but for now let’s just start talking about car
loan interest so I’ll start by saying that car loan interest works the exact
same way as an installment loan with a fixed-rate because that’s exactly what a
car loan is it’s just a loan where you set the contract to a certain amount of
time and the interest rate and then you just pay monthly until the loans paid
off and that’s it so if you’ve got a conventional mortgage or a personal loan
those all work pretty much the exact same way too and as long as the loans
are the same the math is always going to be really easy to do because once you
understand how to do it you can do it on every single type of these loans as long
as they’re the same type of loan just make sure that your loan always has a
fixed rate and not a variable one because a fixed-rate loan is always
going to stay the same and your monthly payment is going to stay the same but if
you have a variable rate that can actually change your monthly payment and
that is not cool because the last thing you want to have happen is to be used to
a $400 a month payment and then all the sudden it goes up to 450 because your
rate changed because you’re on a stupid variable rate because that is not a good
thing to do so the first car I bought when I was 20 years old actually had a
variable rate of about 16 to 18 percent interest and then I paid every single
fee that the dealer had because I was so ignorant when I was buying the car and
now I’m just gonna teach you guys everything that I know so that you don’t
make the same mistakes that I did car loan interest can cost you way too
much or it can actually be fair and that’s all dependent on just how you set
up the loan now with just some basic research I found that the average new
car loan is actually for about thirty thousand dollars and then for used
it’s about $20,000 but in my opinion that’s way too expensive because you’re
counting everyone in the entire country and that is just a really high car loan
and then the average interest rate is about 7% and the average term is about
65 months which is really long and when you end up doing all the math for your
car loan interest those are the three numbers that you’re going to need you’re
gonna need the amount of the loan the interest rate and then how long you’re
paying it back which is the term now right now I’ll teach you how to do the
basic math so that you can get a rough estimate of how much you’re paying on
interest right now on your loan and then I’ll go over the fancier stuff with the
real math so let’s pretend that you have a car loan for $25,000 with an interest
rate of 7% and you want to know how much interest you’re actually paying on it
right this very second all you have to do here is put in 25,000 in your
calculator and then times it by 7% which is point zero seven in your calculator
now you’re gonna end up with 1750 which is 1750 dollars that you’re paying an
interest per year on the amount that you owe right now which is based off of 25
thousand dollars and then if you want to figure out how much interest you’re
paying per month just take 1750 and divide it by 12 which is gonna end up
being a hundred and forty six dollars per month that you’re paying an interest
right now on that loan now that’s just a quick way to figure out how much
interest you’re paying right now but it’s not a hundred percent accurate
because you’ve got to understand that as you make monthly payments some of your
money is going towards the principal or the balance and then some of the money
is also going towards interest as well so as you make your payments every month
and some of that money goes towards your principal you’re gonna owe less which
means you’re actually going to pay less an interest because of it and if you can
make extra payments towards your balance every month I would definitely do that
because in the long run you’re gonna end up paying off your loan faster and
you’re gonna pay less an interest which is just a win-win all because you’re
paying extra on your loan just make sure that the money you’re using for your
extra payments is actually going towards the principal because there’s a lot of
lenders out there that will just stick the money in a cash account if you don’t
specify it with them which i think is super dirty but they do do that so watch
out for it and then some lenders will only let you make an extra payment if
it’s for the exact same amount or more as your monthly payment already is so
for example if it’s three hundred and seventy-five bucks a month and in order
to do an X payment you’re gonna have to come up
with at least 375 bucks in order for it to qualify with them which i think is
super dirty but oh well that’s the way that some lenders do it I’ve had a
couple loans that do this and it is a little bit annoying but what I’ve ended
up doing is just saving up my extra payments until I have enough to qualify
for it and then I just put it towards the loan and that’s the end of it and I
do it again and now I’m gonna teach you guys how to do the real math but you are
gonna have to have what’s called a loan calculator but you can find this on any
app store or you can just Google loan calculator and you’ll find one it
doesn’t really matter which one you use because they all do the exact same thing
so just find one that you think looks decent and used that now right here
we’re gonna be messing with what’s called the ammeter ization schedule
which is basically just a math side of your loan and I can’t do this without a
loan calculator so I always need to do this and I can’t do it on paper because
I’m not that smart but this is how we’re gonna do it and I’m gonna show you how
to do it on my phone okay so this app is called loan calculator professional and
I like it because you can do extra payment math on it but I’m sure the
others can too now all you do is plug in your loan amount which I’ll set to
$25,000 then just set the interest rate which I’ll put it the average which was
7% and then I’ll set it for five years which is sixty months because there’s no
such thing as a 65 month car loan now just make sure that you’re set to
monthly payments and then we won’t do any extra payments for this example hit
the calculate button and you can see right here that we’re going to be paying
495 bucks a month for the next five years and we’ll pay forty-seven hundred
bucks in interest over the life of the loan now we’ll click on the schedule and
you can see exactly what you’ll pay an interest by the month you can see right
here that your first month is going to be about a hundred and forty six bucks
an interest but if you scroll down you’re gonna see that your interest is
going to go down a little bit every single month because remember that as
you pay down your loan you’re gonna pay less an interest because you’re only
going to be paying on what you currently owe and that’s all there is to it so
just make sure that you make your monthly payments for your car every
single month because as you pay down the loan you’re gonna pay less in interest
and that’s just how the math works now go ahead and plug a bunch of different
scenarios into the loan calculator so that you can see all the different
prices and the terms based on what you set so that you can see what you can
actually afford and just remember that you can use this loan calculator on all
your difference as long as they’re a fixed rate because
as long as they’re fixed then you’re good to go and you can do the same math
on all your different loans and then if you do make extra payments on your loan
your schedule is gonna change but it’s gonna be in a good way because remember
you’re always gonna pay off your loan faster and pay less an interest when
you’re paying extra and in my opinion I think the easiest way to pay extra on
your cars is just to round up your monthly payment because you’re probably
not even gonna notice that in your budget so if you have a car payment of
475 bucks a month and I would just round it up to five hundred bucks a month that
way you’re at least paying something extra on the car and it’s not really
gonna kill your budget but at least you’re starting to pay a little bit
extra and then on top of that if you can set your automatic payments to five
hundred bucks a month that way you never have to worry about it and you’re always
just gonna be paying extra which is super easy to do now if I’m making sense
with this video can you please just hit the like button below to let me know
that I’m actually making sense of what I’m trying to do because I really just
want you guys to get what I’m talking about and that is all thank you very
much okay so I’ve talked about this in a lot of my other car videos and it’s
simply the fact that way too many people only care about their monthly payment
and this is a very bad mindset to have because it’s not the right math that you
need to be paying attention to obviously at the end of the day your car payment
does matter because you can only afford so much car but what you’ve got to
understand is that the length of the loan can actually determine your monthly
payment and this can either be a good thing or a bad thing on the math side so
if I were a car salesman and you told me that you couldn’t afford the monthly
payment then all I would have to do is just extend the loan and make it longer
and then your monthly payment would go down but that’s actually ripping you off
more even though you’re getting a better payment because naturally when you make
the loan longer you are gonna have lower payments which might sound like a good
thing but the problem is is that you’re gonna pay way more an interest on the
car and then on top of that you’ve got to understand that cars are depreciating
assets and if you’re not paying them down fast enough you’re actually going
to end up upside down in the loan which is a very bad thing so when you’re
upside down in your car loan it means that you owe more than the car is
actually worth and this is really bad because if you try to go sell your car
you’re actually going to have negative equity in it and you’re gonna have to
start your new loan with even more debt and that’s just a problem that’s gonna
keep going and going until you solve it and stop it
so watch what happens right here when I extend the length of the loan for
the example that we were using earlier we had a four hundred and seventy-five
dollar payment on a twenty five thousand dollar loan that was set for 60 months
at 7% interest but if you change the term to 84 months your payment is gonna
go down to 377 bucks a month but guess how much you’re gonna pay an interest
over the life of the loan you’re gonna end up paying about sixty
seven hundred bucks in interest which is just a total waste of money that you end
up giving to the bank just because you wanted a lower monthly payment and that
is not something that’s good or to be proud of I only recommend that you go up
to five years at the absolute most on your car loan and if you can help it I
would stick between two and three years because that’s gonna get it paid off the
fastest and you’re gonna pay the least amount of interest but of course you can
always fit cash and that’s gonna save you the most overall now if your credit
isn’t very good or you’re a first-time borrower then there’s a really high
probability that you’re gonna get a terrible interest rate and that is not
something that I think that you should take on as far as a car loan goes I get
a lot of comments on the channel where guys are actually telling me that they
have interest rates of about twenty percent because that’s what the dealer
set them up with because of the credit situation but the truth is is that if
you get a rate that’s that bad I would actually recommend that you just save up
for the car and pay cash or that you try to get a cosigner for it because that’s
gonna help you out in the end because those rates are just way too high you
need to understand that if you have a loan for twenty five thousand dollars at
five percent but your interest rate is twenty percent then you’re actually
going to be paying about fifteen thousand dollars in interest over the
life of the loan and that is just way too much money for those types of
interest rates and the worst part about it is that that’s only based on sixty
months so if you actually had a 72 or an 84 month loan at 20% interest then
you’re gonna pay even more which is just so terrible and don’t just go with the
first rate that you’re given especially at the dealership because they can
actually take a cut of the loan and that is not in your best interest because
it’s just a waste of money so if you’re planning on getting a car
loan or you want to refinance your car then I would definitely just start with
your credit unions because they are gonna have really good rates or if you
want a direct recommendation from me then I’d recommend going with light
stream auto loans because they have very good rates and terms and they don’t care
about the make the model or the year of the car which is really cool I’ll leave
an affiliate link in the description below which means I may be compensated
if you click through it but just keep in mind I’m never
recommend a company to you guys that I don’t think is gonna give you guys the
best value and in my opinion I think that light stream is really good now
once again I’m Jason with honest finance and I make a lot of videos on different
topics that will give your life and your finances more value so definitely
subscribe if you guys are into that type of content but for now if you guys want
to learn more about light stream or other car related videos I’m going to
link them up over here but that’s all for now

23 comments on “How Car Loan Interest Works (The Truth)”

  1. RicoSuave Investing says:

    The first few years most of the payment goes to interest. Not worth buying a brand new car.

  2. Kirk says:

    Thank you

  3. vicki - Minnesota to Florida! says:

    I pay $ 700 payment and pay extra 530 on the principal. I made a mistake and got a Six year loan with 10.^ % interest. I plan to refinance to lower interest rate and less years.

  4. KING HEZ says:

    I understand, Thank you!

  5. KING HEZ says:

    Can you make a video about financing a house please?

  6. Naam Wynn - Personal Finance & Investing says:

    Getting car loans from outside banks or credit unions are the best route. I rarely come across a dealer that gives good rates.

  7. Daniel Iles - Small Business says:

    When I step into that dealership 👏 with 👏 that 👏 pre-approved financing 👏 they know they can't scam me!

  8. Honest Finance says:

    Thanks for watching the video. Feel free to comment if you’ve got any questions 🙂

  9. Pricklypear says:

    Does timing of monthly payments (1st or 15th of the month) have financial impacts on the term of a loan? If so, what is the best advice one should utilize?

  10. Harangad Singh says:

    Man, you need to shoot up to at least 10 mil subscribers soon. You're a blessing on the internet.

  11. Oscar Zamora-Bautista says:

    Great interaction methods with your viewers. Great information. You are doing the job for the school system.

  12. Mike Moore says:

    Please just save and use cash, Car payments are a drag on your financial future.

  13. ThatFunkieMunkie says:

    Great video. Always get a loan through your own bank!!! When I was in the auto industry the lender would approve let's say 4% we would lock you in at say 6% to make a profit. All dealers do this unless you deal them down to the base.

  14. Drunken Master says:

    2017 Toyota 4runner TRD Off-Road Premium w/ 30k mi for $35,995. No-haggle price. Out the door = $39,600. Good deal or no? Thanks in advance.

  15. Seth Gaitan says:

    On credit karma, I have a credit score of 749 applied for light stream because I currently have a 18% Interest rate and wanted to refinance. But I actually got denied so just wanted to see if there’s another company I could go to.

  16. Shirley Bauman says:

    I was helped by a professional hacker to pay off my loans and also learned how to make good money weekly. You too can benefit from him. Reach out to him on +1 980 263 9361

  17. Roberto Gonzalez says:

    Does it matter what interest rate/term length we get if we plan on paying off within 1-2 years?

  18. warren wallace says:

    (Need your help) I put 16,900 down on a 2018 gmc Sierra slt crew cab z71 and the price was 40,000+about 4,000 for bumper to bumper warranty and tire and rim warranty using ally financing back in January 2018 my credit has went up from 570 to 670 my arp then was 12% after the deal was done I put another 5,000 payment to the 2nd payment and always pay a little more on each payment. It's been over a year now should I refinance with my credit getting higher or when is it best to refinance. It's July 20 2018 and my next payment isn't till December 2018 but still making the monthly payments to stay ahead.

  19. KingFloydz says:

    very informative video. I appreciate it man. Thank you!!

  20. Bk Wm says:

    you are good man…tnx for the vid

  21. Jared Diaz says:

    I sound like an old man but, I have a car that’s $3,000 it’s ugly and not perfect but it works and I’m saving a ton of money

  22. yugihlh says:

    Nice page, I’ll make sure to comment on your videos, like them, and hit the subscribe plus notification bell 👍🏾

  23. BeyondChange says:

    First Car it got had a Variable Rate on a 72 month Term. Luckily i was able to pay off my Loan in Full Last Week in less than 3 Years! Never again will i get Screwed over again!

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