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What Is Car Loan Amortization?

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Rebecca Lake
Rebecca LakeUpdated August 16, 2022
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Getting financing to purchase a new or used vehicle can sometimes be a better option than paying cash for it. But when you’re reviewing auto loans, it's important to understand how car loan amortization works. Auto loan amortization simply means the process of paying off a vehicle loan. When a buyer uses financing to purchase a vehicle, the lender or financing company should provide that buyer with an auto loan amortization schedule. The schedule explains how the loan payments are applied over time. What this schedule looks like depends on several factors, including the vehicle's purchase price, the loan's interest rate and APR, and the loan term. If you're in the process of calculating the refinance of a vehicle or if you just plan to buy a car at some point soon, auto loan amortization will matter.

How Car Loan Amortization Works

Amortization refers to the process of paying off a loan (a car loan or any other kind of loan) according to a predetermined schedule. When a loan follows an amortization schedule, the payments are divided between the principal owed and the finance charges. Specifically, part of each payment is applied to:
  • Principal. This represents the amount of money you borrowed to purchase the vehicle.
  • Interest. This is the cost the lender charges you for financing the vehicle with a loan.
  • Fees. This includes any fees that are factored into your loan's annual percentage rate (APR). 

Auto Loan Amortization Calculation

The most important thing to understand about car loan amortization is how payments are applied. During the early part of the loan, a larger portion of each payment you make is directed to the interest and fees that you owe. Over time, this balance shifts so that by the time you reach the end of your loan term, more of your monthly payment goes to the principal. This allows the lender or financing company to collect interest and fees sooner rather than later. If you end up defaulting on the loan midway or three-quarters of the way through the loan term, for instance, the lender has already collected a sizable amount of car loan interest and fees for the money it loaned you. Auto loan amortization effectively allows lenders to protect their investments. 

How a Car Loan Amortization Schedule Works

When you finance a vehicle, the lender or financing company doesn't leave you in the dark about how your payments are applied. Instead, it provides you with an auto loan amortization schedule. This amortization schedule breaks down for you:
  • The total number of payments you'll make on the loan
  • The beginning loan balance for the month
  • The ending loan balance for the month after your payment is applied
  • How much of the payment goes toward interest
  • How much of the payment goes toward fees, if applicable
  • How much of the payment goes toward the loan principal

Example Car Loan Amortization Schedule

If you're still shopping for an auto loan, you can use an amortization schedule car loan calculator to estimate what your payments will look like over time. For example, say you want to take out a $20,000 loan with a 60-month term. You plan to put down $2,500 on the loan and you'll pay $940 in taxes and fees at signing, leaving you with a total financing amount of $18,440. Assuming a 4% interest rate, your monthly payments would work out to be $339.60.If you plug the numbers into an amortization schedule auto loan calculator, you'll see that when you make your first payment, $278.13 would go to the principal while $61.47 would go to interest. By the time you reach your 60th and final payment, $338.53 would go to the principal while just $1.13 would go to interest.

What Factors Affect Auto Loan Amortization?

There are a number of factors that can influence car amortization when you’re using financing to purchase a vehicle. The most important are:
  • Down payment. The more you put down on an auto loan, the less you'll have to finance and the lower your monthly payments may be. 
  • Trade-in value. Offering a vehicle for trade-in could also reduce the amount you have to finance and thus lower your payments.
  • Fees and taxes. If you have to pay taxes, title fees, and other costs at signing that are rolled into the loan, that can affect the amount that's amortized. 
  • Interest rate. Your auto loan's interest rate also matters, since a higher rate means more interest paid in total over the life of the loan.
  • Loan term. The longer your loan term, the more payments there are on your amortization schedule and the more interest you'll pay altogether, even though what you pay per month may be less than you’d pay with a shorter term. The loans can extend for a very long period, producing a 72-month schedule.
If you're shopping for a vehicle, using a car loan amortization calculator to play around with the numbers can be helpful as you set your budget. You can see at a glance how choosing a shorter or longer loan term, financing a smaller or larger amount, or getting a higher versus lower interest rate can affect your financing costs. 

4 Things to Do to Improve Your Amortization Schedule

There are some things you can do to directly impact what your car loan amortization schedule looks like and how quickly you're able to pay the vehicle off. They include:

 1. Getting More Favorable Rates

Improving your credit score may help you qualify for more favorable auto loan rates.

2. Larger Down Payment

Offering a larger down payment should reduce the amount you need to finance.

3. Less Expensive Vehicle

Adjusting your budget to allow you to purchase a less expensive vehicle will make a difference.

4. Making Extra Payments

Making extra payments toward the loan's principal, beyond those dictated by the amortization schedule, will help.

Refinancing Can Affect Car Loan Amortization

If you have a vehicle loan currently, it's possible that you might want to refinance it into a new loan at different terms. Doing so could save you money if you're able to secure a lower interest rate. But auto loan refinancing can also affect your car loan amortization schedule. For example, if you end up extending the loan term, that can add months or even years onto your amortization schedule. And again, the longer the loan term, the more interest you could end up paying altogether, even if the new rate is significantly lower than your original auto loan. Before refinancing, it’s a good idea to do the math to determine how much you could save in interest to help you decide if it's worth it. Keep in mind that you may have trouble refinancing an auto loan if you're currently upside down, meaning that you owe more than the vehicle is worth. Lenders may require you to have a certain loan-to-value ratio to be approved for a refinance loan. 

The Takeaway

When it comes to financing a vehicle, it's important to ensure that you're getting the most value for your money. Your auto loan amortization schedule is a major tool in understanding where your money is going. Knowing how car loan amortization works can help you choose the right auto loan financing option for your needs in the future. And it can also give you some useful guidelines if you want to consider refinancing your current auto loan.Use auto loan amortization tools to get control of your loan.

Frequently Asked Questions

How is amortization calculated for car loans?
Are 72-month car loans a good idea typically?
Is every auto loan amortized?

About the Author

Rebecca Lake

Rebecca Lake

Rebecca Lake is a freelance writer specializing in personal finance, investing and small business. Her work has appeared online at U.S. News and World Report, Forbes Advisor, and Investopedia. Rebecca writes about a variety of topics for SoFi, including budgeting, saving money and student loans.
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