Car Loan Repayment Calculator - How it is Calculated and Why it Costs You More

First, let us say that you borrow 4000 for a year at 20% interest. With the banks, that interest is applied over the year on a daily, or maybe a monthly basis. For example, they work out how much you have left to pay and then calculate one day's interest on that amount. As your balance reduces, the interest charged each day reduces. This makes it very a complicated calculation, as you need to take into account how much has been paid off before you calculate the interest.

But the situation is much easier with car loans! That, unfortunately, is the only good news. If the interest rate is 20% and the amount borrowed is 4000, then the interest for the year is 800. Simple. But the bad news, when you look closely, is that there is no credit given to the amount of the loan that has been repaid. Each and every month the interest charged is the same.

This situation is worse still as the term of the loan is increased. On our example load, the interest over 3 years could be 800 per year or 2400 in total. Yes, with a bank calculating the interest in the daily manner, you would reasonably expect that after 2 years at least half of the loan would have been repaid, so the interest charged each day or month would have halved.

There is also another way that the car loan gets more money from borrowers. People giving out car loans are usually happy for you to pay it off early if you wish. This is not always the case with the traditional bank loan and if you are likely to be able to pay off extra amounts you should check with your lender whether it is allowed.

So why are the car loan lenders happy to let you pay off early? Well again it is down to the simple way in which they calculate the interest. Because they calculate the interest on day one and apply that to your loan, whether you pay off the loan in the agreed term or in half of the time, they still receive the same interest. In fact, if you pay it off early, they themselves then have the extra cash available to lend to another lender. So there is no reason for them to refuse over payments. But with a traditional loan if you pay it off early, you are then no longer paying the interest and the lender loses out.

With this initial calculation of interest, a car loan repayment is a lot easier to calculate than a traditional loan, but the lender ends up charging you a lot more interest over the course of the loan and there is no saving if you pay it off early. Before you sign on the dotted line for a new car loan, ask your friendly bank manager if they have any suitable loans available and what they would cost.