Calculating car loans

Choosing a new or used car is a big job. There are countless styles to choose from. Problem is, many people put all of their attentions into choosing a car, and don't even consider shopping around for a car loan.

Calculating car loans is an important step in borrowing the money you need to purchase a car. This is because a car loan calculation allows you to estimate the monthly payments required to own the car, before you make the final purchase.

There are many factors to consider in calculating car loans. There are three very important questions that you must be able to answer:

- What is the interest rate?

- What is the loan period?

- What is the loan principal?

A qualified lender will happily provide you the answers you need. This information may also be available online. Once you have the answers you need, you can then begin calculating car loans to help you make the final decision. Your car loan calculations will allow you to estimate your total costs, and confirm how much you're able to afford based on your income. To fully understand these calculations, you need to know what all of the financial terms mean.

Interest Rate

The interest rate is generally expressed as a percentage. This is the amount of money paid on top of the initial amount borrowed. It's considered to be the cost of financing. Let's say you borrow $10,000 to buy a car, but at the end of the term you've actually paid $18,000 in monthly payments. The extra $8,000 is the interest, and it's calculated to reflect the current interest rate. Rates do fluctuate, so shop around to get the best deal.

Loan Period

This is the "life cycle" of the loan. It's the length of time that the borrower has agreed to take to repay the loan. Most car loans are for periods of two, three or four years. The principal and interest payments are spaced equally throughout the loan period.

Loan Principal

When calculating car loans, the loan principal is the amount of money originally borrowed. Loan principal is a term used in finance that refers to the original amount of the debt, before additional fees or interest. Your total interest charges at the end of the loan period will depend upon the amount of the loan principal, as well as the loan period. With this in mind, it's easy to see that the loan principal is the foundation of calculating car loans. In some cases, the loan principal is used to refer to the amount of money owing, after the debt has been partially paid. In other words, it's the outstanding balance. With each monthly payment, this amount slowly and steadily decreases, until eventually the entire balance is paid off.

Don't be surprised if you check on the principal balance after a few months, and find that it's barely been touched. That's because your first few months of car loan payments cover mostly interest, and very little principle. Only a small percentage is used to pay off the balance. This repayment plan is common in amortization loans. After these initial months, your monthly payments will be divided in half, with equal amounts going to pay off the interest and reduce the principal. This trend continues until the remaining principal balance has been paid.

Buying a car takes a lot of research and smart decision-making; and choosing automotive financing should too. Calculating car loans is essential to arranging financial assistance that you can afford, and making your dream of car ownership a reality.