A Lower Monthly Payment On Your Car Loan Doesnt Always Mean Youre Saving Money Heres How Car Loans Work
Purchasing a car typically means taking out a car loan. If youre in the market for a new vehicle, youve probably spent a lot of time researching car options, but do you have a good understanding of how car loans work? When you take out a car loan from a financial institution, you receive your money in a lump sum, then pay it back over time. How much you borrow, how much time you take to pay it back and your interest rate all affect the size of your monthly payment. Here are the 3 major factors that affect both your monthly payment and the total amount youll pay on your loan:
How Much Will Borrowing On A Credit Card Cost
On average, credit card interest rates are around 16%. For an auto loan, you can work with about 6%.
How much will this extra 10% interest cost you in the long run?
If you get a loan of $10 000 and you repay it over a period of three years your interest repaid will be $952 for an auto loan and $2 657 for the credit card. So youll end up paying $1 705 more interest with a credit card than an auto loan.
If you take out a loan of $20 000 and repay it over a period of five years your interest paid for the auto loan will be $3 199 and $9 182 for the credit card. You end up paying $5 983 more for the credit card.
The Pros And Cons Of Simple Interest Auto Loans
Simple interest loans are a beautiful thing. Let’s take a look at some of the benefits of simple interest auto loans:
- Set payment amount, for a set time frame
- Making larger payments than required reduces your principal balance more quickly, and therefore reduces your remaining interest charges
- You’re not paying “interest on interest”
- Simple interest loans can be paid off early
On the flip side, there’s one major con to consider, especially if you struggle with making on-time payments:
- Late payments typically incur late payment fees, which are spelled out in your car loan contract. These fees can really add up, and have to be paid at the end of the loan term in order for a lender to release the lien on the title.
You May Like: How Much Does It Cost To Get A Vehicle Painted
What Is A Simple Interest Loan
Simple interest is a method of allocating monthly loan payments between interest and principal. The amount of your payment allocated to interest is calculated based on your unpaid principal balance, the interest rate on your loan, and the number of days since your last payment.
ExampleIf we receive a payment and it has been 29 days since your last payment, then you will be charged 29 days of interest on the unpaid principal balance of your loan. The remainder of your payment is credited to principal and reduces the unpaid principal balance on your loan.
I Bought An Aftermarket Product And Can’t Remember What It Covers Where Can I Find This Information
The contract for the aftermarket product will provide the details of the coverage, including items such as the cost, what is covered and excluded, and how long the coverage lasts . If you have questions about the coverage, contact the dealership or the coverage provider their contact information is listed on the contract. To request a copy of the contract, contact the dealership or call us.
Read Also: Florida Title Copy
What Is An Amortization Schedule
Curious about how much of your monthly payment goes toward interest and principal? You can answer this question by creating an amortization schedule. This schedule provides a road map of how your payments will be allocated between interest and principal over the term of your car loan.
Some online calculators can help you estimate your amortization schedule. To calculate your schedule, youll need your loan amount, interest rate and the loan term.
What does a typical amortization schedule look like? Lets say you made a $3,000 down payment on a $30,000 car in January 2019. To pay the balance, you took out a $27,000 car loan with a five-year loan term and 10% interest rate.
Your car loan amortization schedule would look like this.
As you can see from this example, the amount paid in interest decreases each year. As the total interest paid gets smaller, a larger portion of the payment goes toward reducing the loans principal.
I Need To Change A Name On My Vehicle Title And My Loan Account Has An Outstanding Balance What Should I Do
Begin by checking with your motor vehicle department to find out what title documentation youll need. When we receive the request, well send the title documentation in the appropriate format.
- If the motor vehicle department asks for a copy of the title, an electronic screen-print, or an authorization letter, you or the motor vehicle department can request that from us.
- If the motor vehicle department needs the original paper title, they will need to request the title from us.
Youll then go to the motor vehicle department to formally request the title change. The motor vehicle department will either send the information to us directly or will provide you with the required document. If you receive the document from the motor vehicle department, you can submit it to Wells Fargo Auto, along with one of the following documents:
- Articles of amendment
Please allow three to five business days for processing from the date that we receive the required documentation.
Read Also: How Long Do Car Batteries Last In Texas
Is A Down Payment Required To Use An Auto Loan
Car dealerships typically recommend 5-10% down payment for a new car, while financial advisors may suggest up to 20% for a down payment on new cars. Lender requirements often dictate the down payment required, and otherwise, it can be left to your personal investing preferences.
Down payments can be in the form of a trade-in vehicle, cash, check, or debit/credit card. Some maximum payment limits may apply when using a credit card.
A down payment lessens the total amount of money you will need to borrow, consequently leading to lower interest rates and potentially, a shorter lease term. It also makes it simpler to get approved for a loan and offsets depreciation.
Since putting money down can prove your committment and ability to pay to lenders, it can lead to quicker loan approval and lower interest rates. If your credit score is less than 600, a down payment may be required to be eligible for a loan.
It is possible to finance a car with an auto loan, without any money down, however, the lack of down payment can increase your chances of negative equity.
How A Simple Interest Car Loan Works
In simple terms, a car loan is a way to borrow money from a bank or other financial institution so you can buy the car youve been eyeing. You make monthly payments toward the price of your new or used vehicle, and in between those payments, you have possession of the car itself.
Each time you pay toward your auto loan, the interest youve accumulated begins to shrink. The amount of money you borrow dwindles as you pay back the loan until, eventually, your balance equals what you initially borrowed minus the total you have paid back.
So why not just pay off your car loan early? You could if it were a simple interest loan. Unfortunately, most car loans are amortized, which means you have to keep them for the full loan term.
Read Also: What Does Car Shield Pay For
Why Do I Still Have A Loan Balance If I Have Gap
There are limitations and exclusions for GAP, which you can find in the contract. For example, GAP may not cover late payments, late fees, or payment deferments. If you have questions about the coverage, contact the dealership or the coverage provider their contact information is listed on the contract. To request a copy of the contract, contact the dealership or call us.
The Consumer’s Guide To Personal Loans
Applying for a personal loan is probably one of the easiest ways to secure additional cash on-hand, making it ideal for paying off credit card debt & consolidating other high-interest debt.
Application can be a bit time-consuming, which is why it is important to prepare all of the necessary documents beforehand to speed up the approval process.
You May Like: Aarp Discounts Car Rental
My Vehicle Was In An Accident And I Received An Insurance Check For The Repairs How Do I Cash The Insurance Check When It Is Payable To Both Wells Fargo Auto And Me
If the check amount is $2,500 or less, you can take the check to a Wells Fargo branch and ask an employee to endorse it on behalf of Wells Fargo Auto. Find a Wells Fargo banking location near you. If you are unable to visit a branch, please call us at 1-800-825-8506, Option 4.
If the check amount is more than $2,500, please call us at 1-800-825-8506, Option 4, for instructions on how to endorse the check and for next steps. Were available to assist you Monday Friday, from 7 am to 7 pm Central Time.
What Is Meant By Simple Interest
In mathematics, simple interest is the method of calculating the interest for the principal/loan amount. Simple interest is used in most of the sectors such as finance, banking, automobiles, and so on. If the principal amount, interest rate, and the time period are given, the simple interest can be easily calculated. The formula to calculate the simple interest is given by
Simple Interest, SI = /100
Don’t Miss: Replace Title Florida
How A Lower Monthly Payment Can Cost You More
One of the most important things to understand about how auto loans work is the relationship between the loan term and the interest you pay. A longer loan term can dramatically lower your monthly payment, but it also means you pay more in interest.
Consider a $25,000 car loan at a 3.00% APR and a 48-month term. Over 4 years of payments, youll pay $1,561 in total interest on the loan. If you extend that same loan to a 60-month term , youll lower your monthly payment by $104but youll increase the total interest you’ll pay from $1,561 to $1,953.
When Will I Receive My Title After I Pay Off My Loan
After we receive your final payment and the account balance is satisfied, we will release your title depending on the payoff method, state law requirements, and state motor vehicle department procedures. The title release process can vary in length and depends on if you have a paper, electronic, or customer-holding paper title. If you are unsure of which category applies to you, please contact your local motor vehicle department. If you have additional title-related questions, please call us at 1-888-329-4856.
Paper title maintained by Wells Fargo AutoWe start the title release process in approximately 3 10 calendar days after the payoff posts to your account, to allow enough processing time for your payment to clear through your financial institution, or as otherwise required by state law. To shorten the title release process, payment by guaranteed funds will begin the process within 3 calendar days.
Please note this does not include mail time.
If the payoff amount received does not satisfy the amount owed, the title will not be sent until the balance is settled. If you have additional title-related questions, please call us at 1-888-329-4856.
Electronic title maintained by your stateFor electronic titles, you will not receive a paper title from Wells Fargo Auto. At the time of release, we will electronically cancel our lien with your state. After the lien is released, your state will mail your title in approximately 4 8 weeks.
Also Check: How To Pop Out Hail Dents
Knowing Your Car Loan Amount And Interest Rate Can Be Crucial For Financial Planning But Understanding How Youre Paying Off Your Loan Over Time Can Be Just As Important
The process of paying down your loan over time is known as amortization. With an amortizing car loan, some of your monthly payment is applied to the amount you borrowed, which is known as the principal, and some goes toward interest and any fees.
Lets dive into how car loan amortization works and what an amortization schedule looks like. Well also go over factors that can affect that schedule and, in turn, how that affects the amount of interest you pay over the life of the loan.
How Much Of My Monthly Payment Is Interest
With a simple interest loan, there is a daily interest charge and you will pay interest on the number of days between your payments.
ExampleIf the daily interest charge is $2.50, and it has been 30 days since your last payment was made, the interest due will be $75.00 . Lets use the same daily interest charge, but now say it has been 40 days since your last payment was made, the interest due will be $100.00 .
If you defer a monthly payment, this will extend the term of your loan, and the interest will continue to accrue until the next payment is made. The outstanding loan balance will continue to accrue interest until the loan is paid off.
The total interest paid over the term of your loan may be different from what is shown on your loan agreement. If you pay your loan early, the amount of interest will be less, and if you pay your loan late, the amount of interest will be more.
You May Like: How To Get Internet In A Car
What Happens If I Make A Payment That Does Not Clear
If a payment is returned unpaid, we may attempt to present the payment to your financial institution one more time. Your financial institution may charge a fee each time the payment is returned. If the payment doesn’t clear, youll need to resubmit the payment once you have sufficient funds in your bank account.
Help To Protect Yourself During The What
Youre responsible for paying everything thats included in the APR, even if your vehicle is totaled in an accident or stolen auto insurance may not always cover the full amount you owe. GAP insurance may provide you with financial protection if your car is ever totaled or stolen and the insurance settlement amount does not cover the unpaid principal balance due on your loan. That could mean you wont have to roll the unpaid principal balance of the existing loan into the cost of financing a new vehicle. Shop for your loan before you shop for your vehicle to determine available interest rates, APRs and payback periods.
The information in this article was obtained from various sources not associated with State Farm® . While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
You May Like: Notarized Arizona Car Title
Are Car Loans Simple Or Compound Interest
Does a car loan have simple or compound interest? Someone told me that compound interest is better, but I donât really understand the difference.
this is a good thing
- Simple interest is a percentage of the loan amount. When you sign your car loan, you agree to pay a certain sum in interest, which a lender includes in your monthly payments. You pay off that amount as you pay off your loan.
- Compound interest is calculated at each payment. With compound interest, you pay interest on each payment, meaning you could end up paying interest on interest. While it may not be great for car loans, compound interest is good in some circumstances! For example, if you invest, an account with compound interest will earn more money over time than an account with simple interest.
$879 per year
Why Didnt My Auto Loan Payment Decrease After A Refund Was Applied To My Account
The monthly loan payment is calculated from the terms in the original loan agreement. Your loan agreement is not rewritten because of the refund, so your payment does not change. The refund is applied to your current principal balance which means you have less money to pay back. This may reduce the amount of interest you pay, and it may help you pay off your loan more quickly than the original term.
Recommended Reading: How To Restore Clear Coat