Overhaulin'

I have a car loan at 14.9% (It was my first car, and I had short credit history). How does this work?

If my loan was for roughly 11,000, does this mean I pay 14% of 11,000? Or is interest calculated differently....like after my first payment of x ammount. Whatever is left over is then put at 14% of that?

Public Comments

1. The interest is charged on the outstanding loan balance each month. Your payment should be a fixed number over the life of the loan. An amortization schedule is used so that the payment is fixed, but the loan balance drops each month. It works like this: On a 5-year loan, for $11,000, at 14.9% interest, your payment should be about $261 each month. At the beginning of the loan, you owe $11,000. At the end of the first month, you owe one month's interest on the balance. One month's interest is 1/12 of 14.9% x $11,000 = $136. Since your payment is $261, you have paid $261 - $136 = $125 toward principal. Since the loan balance dropped by $125, at the end of the second month, you only owe one month's interest on $10,875, which is $135. So now you have paid $126 to principal. It keeps going like this until you pay off the loan. In total, you are paying $261 x 60 = $15,660 in payments, or a total of $4,660 in interest. The reason it is not just 14.9% of $11,000 is that you have an unpaid balance every year, not just the first year. Hope this helps!
2. Check http://www.bankrate.com/finance/money-guides/getting-the-first-car-loan-1.aspx for some general information on financing and rates. You are paying a very high rate though, the average rate is much lower on new cars. The average interest rate on new car loans at auto finance companies hit an all-time low of 3.17 percent, according to the Federal Reserve. This new rate of 3.17 percent beats the old record of 4.85 percent, which was the rate in the first quarter of 2008. But there is no standard answer to your question, it depends entirely on how the bank figured the interest. Most often they go by the rate per month, you'd be paying 1.24% monthly. So, on your first payment, $136.40 would be taken as interest, and the rest would be taken off your balance. As you can surmise, the interest would drop slightly each month and towards the end most of the payment would come off the balance with very little on interest. Some bank do simple interest, and just add that to your loan and divide by the number of payments to get your monthly payment. Read the papers you signed, it will be explained. If I were you, I'd look to refinancing as soon as you can can to get the rate down.