How to Calculate Amortization for a Car Loan
When you decide to buy a car, you’ll need to consider how you’re going to pay for it. Most auto loans come with an amortization period, which dictates the number of payments you’ll make on your loan over time. Calculating your amortization auto loan can help you understand how much of your payment goes toward the principal balance and how much goes toward interest.
What Is an Auto Loan Amortization?
An auto loan amortization schedule is a way to help you better understand how much interest you’ll be paying back, based on the loan amount, time, and your monthly payment. It shows you how much of your loan will go towards each end of the repayment period, including principal payments and interest fees.
How to Calculate Auto Loan Amortization?
Calculating your auto loan amortization can help you understand how much you’re paying each month and allow you to set a budget for your new vehicle purchase. Follow these simple steps to calculate your auto loan amortization:
Step 1: Use your car’s interest rate as the annual percentage rate (APR) for the loan. Divide this number by 12 to convert it from a yearly APR to a monthly APY.
Step 2: Calculate the number of payments you will be making on your loan and the total amount of payments. You can calculate the number of payments you will be making on your loan by using the following equation:
# of payments = amount borrowed / (annual rate/12)
For example, if you borrowed $20,000 at 4% annual interest with monthly payments, you will be making 36 monthly payments (20,000/ (4/12)).
Step 3: Calculate the remaining balance of your loan after each payment. Use this form to calculate the monthly payment and remaining balance of your auto loan:
a) Add a new column to your spreadsheet and write down the remaining balance of your loan at the top
b) Subtract the amount of the payment from the balance of your loan
c) Using the payment schedule found on the auto loan amortization schedule for your loan, enter the amount of each payment in your spreadsheet
d) Divide the payment amount by the number of months of payments — this is how much you pay each month
Here is a more simplified version of the amortization auto loan equation:
1. To calculate the remaining balance use the formula: new loan balance = old loan balance + (old loan balance x interest rate / (1 + interest rate))
2. You can modify this to calculate the amount of your monthly payment using the formula: monthly payment = old loan balance / (1 – interest rate)
As an added bonus, calculating auto loan amortization gives you a way to check on your monthly payments, helping identify when extra money is needed to pay off your loan early. According to Lantern by SoFi, “When a loan follows an amortization schedule, the payments are divided between the principal owed and the finance charges.” Most auto loans are amortized over five years or less but can be amortized up to 10 years if needed.
Calculating auto loan amortization is a pain, but auto loan amortization calculators can do all the hard work for you. With a good loan calculator, you can get a snapshot of your monthly or annual payments and the total cost of your auto loan in no time.