Auto Loan Payments

When you borrow money to purchase a new or used car, the payback is structured for you to make regular monthly auto loan payments until the loan is paid off in full. The amount that you will have to pay back each month on your auto loan depends upon the principal of the loan, the interest rate on the borrowed money and on the number of months you have to pay it back.

Principal, Interest Rate and Loan Amortization Period

These three terms make up the basis of an auto loan. The principal is the amount of money you borrow from a lender, whether it is from a bank, credit union, car dealership or other loan agency. The interest rate is essentially the price of borrowing that money. The time you have to pay it back is known as the loan amortization period. If a lender were to loan you $20,000 to purchase a car and you paid them the same amount back in 5 years, they would make nothing on the deal. They would break even. That is where interest factors in to the equation. The interest you pay on the loan represents the profit the lender earns on the money they lend you. With compound interest, that profit can be quite high, which explains the incentive for lenders to find as many takers for car loans as possible. A person who borrows $15,000 at 5.0% interest for 5 years pays back more than $4,100 in interest on top of the original $15,000.

The auto loan payments you make each month represent a portion of the principal plus interest. Using the same example as above, the monthly payment on a $15,000 loan at 5.0% for 5 years would be approximately $283.06 per month. Find a simple online loan calculator to determine the monthly payment for a loan you are considering, and you can work the amount into your budget.