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