Amortized car loans are very popular for many important reasons. They reduce credit risk, lock in a good interest rate, produce a stable monthly payment and set a specific number of months in which the loan will ultimately be paid off.
Loan ‘Amortization' is the breaking down of a loan and the associated interest into a series of payments of equal amounts. In a car loan amortization, the total cost of the car minus the down payment or credit that is given for a trade and is divided by the number of months in the agreed upon length of the loan. That means on a 5-year loan, the total amount of money owed is divided by 60 months. The total interest on the loan is also divided by 60. Together those amounts represent how much money the borrower has to pay each month to pay off the loan in the agreed upon period.
How The Payments Are Broken Down
While amortization has the borrower paying a set amount of money each month, how that money is broken down each month changes over time.
- Early in the loan repayment process, a more substantial portion of the payment goes towards paying the interest off the loan.
- The percentage of the payment that goes to pay interest gradually shrinks each month until by the end of the loan most of the borrower's payment goes towards the paying off the principle.
- It seems like the auto loan and refinancing companies want to make sure they collect their interest as quickly as possible.
Killing The Loan
The root of the term amortization is ‘mort,' which means to kill, deaden or eliminate. In an amortized loan, the owed amount is killed off a little each month with each payment. However, it's the bulk of the interest that dies first eventually followed by the principle. Interestingly enough, each payment in an amortized loan makes the borrower's credit healthier and stronger. Amortization makes it possible for a borrower to know precisely how much they need to budget for their auto loan and how long it will take to pay it off. It is a unique type of loan because of the way the size and structure of the payments are determined.
Not An Interest-Only Loan
Some people think amortized loans are similar to interest-only loans because the repayment plan focuses heavily on paying the interest in the early part of the loan repayment process. However, loan amortization is not an interest-only loan. From the very beginning, a sizeable portion of the payments is applied towards the principle. Plus, with an interest-only loan, there is usually a large balloon payment due late in the loan repayment process. With loan amortization, the size of the payment remains the same throughout the life of the loan. This is something that makes loan amortization popular with borrowers. They always know exactly how much is owed each month.
Changing Repayment Percentages
With an amortized loan structure, by the time half of the loan has been repaid, the percentage of the monthly payment that goes towards the loan's principle and the interest added to it tends to be about equal. In the later part of the loan repayment process, a much larger percentage of the borrower's monthly payment is applied to the principle. This reduces the balance owed much more rapidly. However, for the borrower, they can depend on the amount they pay each month remaining the same. The shifting percentages are handled by the lender without the borrower's input or knowledge.
Paying The Loan Off Faster
One method borrowers can use to pay the amortized loan off faster and save some money is to send additional payments each month earmarked to be applied to the principle. To do so, all the borrower has to do is make the lender aware they want the additional money they send to be used towards the principle. This helps to reduce the amount owed on the loan faster and can save the borrower a significant amount of money over the life of the loan. The borrower ends up owing interest on a smaller amount earlier in the life of the loan. The key is making it clear to the lender the additional money is to be applied to the principle.
Lenders Reduce Risk Through Amortization
Car loans can be structured in many ways. Many lenders prefer amortization because they find having equal monthly payments for a set period of months a safer way to ensure the loan will be repaid. With balloon loans and bullet loans, the borrower can stop paying and return the car when the large payment becomes due. With an amortized loan, the borrower agrees to a monthly payment they can afford, and they are more likely to continue making the payments until they pay off the loan. Amortization creates less risk for the lender on high-dollar loans by spreading out affordable, equal-sized payments over a set period.
Car Loan Amortization Benefits Both Parties
Car loan amortization offers benefits that both lenders and borrowers enjoy. One significant advantage amortizing car loans provide for the lender is each month they get a set payment that covers a portion of both the principle and the interest. Car loan amortization benefits the borrower by giving them a stable monthly payment amount they can plan for in their budget. Plus, the borrower also realizes that making their payments on time each month improves their credit score and prevents them from having to pay late fees that can increase the amount of money the car will cost them. That makes car loan amortization a win-win proposition.
Easy To Pay And Track
Amortized car loans are easy to pay. The amount due each month never changes, and the length of the repayment contract and the number of payments required are clearly stated at the beginning of the contract. Plus, tracking the loan is simple. All borrowers have to do is count the number of payments they have made, subtract it from the number they agreed to make, and then the borrower knows exactly where they stand. There are no irregular payments to cause confusion. The entire process is simple and straightforward. The borrower can even do the math and figure out exactly how much they will pay for the car in total.
Easily Calculate Your Balance
With an amortized auto loan calculating the balance you owe on your car is a breeze. Using a loan amortization schedule makes figuring out the amount that needs to be paid to own the vehicle free and clear even easier. All the borrower has to do to know the outstanding balance on their car loan is to enter the car loan amortization rate and the number of payments or years left on the loan. This allows them to calculate their balance in seconds. This takes the guesswork out of the process of paying for your car. It also gives car buyers who use amortized loans added confidence in the process.
Changing The Car Loan Amortization Schedule
Even though the amortized car loan schedule represents a repayment plan to which both the lender and the buyer have agreed, most companies are usually willing to adjust the payment schedule to help the borrower in some instances. If the buyer has been making their payments on time and in full for a significant period and a sudden, unexpected, hardship prevents them from making their payments on the agreed-upon schedule in the short term, lenders are usually flexible enough to be willing to work with them.
Generally, all the borrower has to do is call the loan company, honestly, openly and clearly state the nature of their problem and tell the company how soon they will be able to resume the regular payments to which they agreed. If the hardship is deemed legitimate and the loan company is confident the borrower is acting in good faith and will resume making full payments quickly, they will often make the requested adjustment to the repayment schedule. If the company's representative does not give a satisfactory answer, the borrower should ask for an opportunity to talk to a manager to get the situation resolved. As a second option, the customer is encouraged to consider refinancing the original loan.
Using A Loan Amortization Table
A loan amortization table is a tool people can use to understand their car loan better. It can help to explain how the payment borrowers make each month is used. The car loan amortization table shows how much of each monthly loan payment goes towards the principle and how much of it is used to pay the interest on the loan. If you need a good, reliable loan amortization table, you can contact your lender or Valley Auto Loans, visit one of the local banks in your community or go online and request one through a website you trust.
The loan table uses an amortization calculator to create a chart showing your payments and how they are broken down. Filling one out can help you see how making additional payments against the principle of your loan can save you money by enabling you to pay off the loan faster. Some people use a loan amortization calculator. Individuals are able to figure out what their monthly payment will be before they commit to an amortized car loan. They put in the price of the car, subtract their down payment, add the loan's interest rate and divide by the number of months the loan will run. This provides an estimate of the amortized payment. If the amount fits into their budget, the borrower then agrees to the loan.