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About Auto Loans
When purchasing a car, you’ll have to consider the price of the car, interest rates, taxes, down payment, and more to determine what you can afford.
Make your best estimates. You can establish a total loan amount by adding the price tag of the car to sales tax and possible dealer fees, multiplied by annual interest rate. Subtract your down payment, and divide it by the length of your loan in months to get a rough idea of what your monthly payment would be.
Car Loan Payment Example
If you want to buy a $25,000 USD new car at a 4% interest rate with 7% sales tax, your total loan amount would come out to around $26,750. If your loan were to last five years, your monthly payment would be about $495.
When you take out an auto loan, the lender will typically require you to make monthly payments towards the principal and interest of the loan. Over time, these payments will reduce your outstanding balance until you’ve paid off the entire auto loan. The process of gradually paying off a debt through regular installments is called amortization. Amortization will show how much the monthly repayment affects your balance each time you make a payment. You can even establish an auto loan amortization schedule that includes extra payments you’d like to make.
Compound Interest Definition
Compound interest is earning interest on top of interest. When you invest money, you’re expecting to get a return on your money, meaning that you should end up with more money than you originally put in.
If you leave that money alone (the initial principal plus the interest), compound interest applies the interest rate to the total new amount of money earned, so that it builds exponentially over time.