Car Loan Interest Rates Explained (For Beginners) - YouTube

So when it comes to car loan interest i really  feel like it's not that hard to understand but  

i do get a lot of questions on the channel asking  about it and honestly i think a lot of people are  

being misled about how car loan interest works  because there's a couple things that i have to  

debunk first here the first thing that a lot  of people tend to think is that your total loan  

includes the interest that you're going to  be paying on the car so for instance if you  

finance a total of 22 000 a lot of people tend to  think that the interest is included in that 22 000  

and that is not true interest is going to be on  top of your loan and that is always the way that  

it works on simple loans for fixed interest  rates and a lot of people also think that the  

total interest that you'll pay on the car is just  by taking the interest rate and multiplying it by  

the total amount that you borrow so for instance  if you borrow thirty thousand dollars and you have  

an interest rate of five percent then you multiply  those together and you'll end up with fifteen  

hundred so a lot of people think that 1500 bucks  is the total that you're going to pay an interest  

and this is also not true because interest rates  are generally applied yearly that's why you see  

apy next to an interest rate and because of that  if you have the loan for five six years that is  

going to change the math tremendously because  as you pay down the loan you pay less interest  

and that's the main point of this video is i  want to show you exactly how interest works  

so that you can do the math yourself and know  for sure if the interest you're paying on the car  

is going to be worth it to you or not now before i  get into everything i need you to understand that  

car loan interest is affected by three main  areas because the first area that you need  

to consider is how much you're actually going to  be borrowing because obviously if you have a ten  

thousand dollar loan versus a hundred thousand  dollar loan at even one percent interest you're  

going to pay more in interest on the higher  amount that you're borrowing so you need  

to consider that first and then the second  area is obviously the interest rate itself  

so if we're talking zero percent interest that's  great you're not going to pay any interest  

but if we're talking two percent interest versus  ten percent that can have a huge swing on how  

much interest you're going to pay over the life of  the loan especially if you borrowed a ton of money  

and you had a really long car loan because the  third area that's affected surprisingly the most  

is the length of the loan because if you've got a  three-year car loan you're actually going to have  

a higher monthly payment than a five-year loan  but you're going to pay a lot less in interest  

because it's two years shorter because the way  that the interest works is you start at the top  

and you slowly pay down the loan and  you're only paying interest on what you owe  

so if you can pay that off faster then you're  obviously going to pay a lot less in interest  

so to keep this simple let's pretend that you  go out and you find a car that you really like  

and after taxes fees down payment everything you  end up financing twenty five thousand dollars and  

let's say that your credit's pretty good and you  end up with a three percent interest rate and then  

you want to finance the car for 60 months which  is five years because that's how long you want  

the term to be now with that math you're going  to end up with a car payment of about 449 bucks  

and then the total interest that you're going to  pay for the life of the loan for the entire five  

years is going to be a little bit over 1900  dollars so you're really going to pay about  

27 000 ish for the car and that's how the  math is going to work but the question is  

how did i get these numbers because i'm no rocket  scientist here i don't know how to do this math on  

my own and i always just use a loan calculator and  that's exactly what i want you guys to do as well  

you're going to look it up on an app store  or just on google find any loan calculator  

and you're going to plug in these basic numbers  i'll show you exactly how to do it and what the  

rest of the loan is going to entail for you so  right here inside the loan calculator you can  

see that for the loan amount at the top i put in  25 000 bucks the interest rate three percent on a  

five-year term and then below here under payment  it tells you exactly what you're going to pay  

which is 449 bucks a month for 60 months and  then down here under the total repayment you  

can see that you're borrowing 25 000 your total  interest is going to be 1953 and then total repaid  

is 26 953 when everything is said and done and  that is exactly how a loan calculator works on  

the surface all you have to do is plug in the  different numbers that you're playing around with  

and it will calculate everything for you now  i want to show you the payment schedule inside  

the loan calculation so you guys can see that as  you pay down your loan you're also going to pay  

less interest so right here on the very first  payment you're going to pay principal of 386.72  

and interest of 62.50 now let's go all the way  down to month 15 and you can see here that it's  

changing significantly because now you're going  to pay 400.47 in principle and then you're going  

to pay 48.74 in interest and this is because as  you pay down your loan you're going to pay less  

interest because you're only paying interest on  what you owe so what i would do if you really  

want to speed up the process is try and pay extra  towards your principal every single month that way  

the balance is going down even faster and you're  going to end up paying less in interest over  

the life of the loan and you're going to end up  paying off the loan early which is just a win-win  

now that you know how to do the math yourself  you can obviously check this information  

whenever you're looking to buy a car or you can  check what's happening with your current loan  

because if you look into your loan and you realize  that you have a really high interest rate and  

maybe it's pretty long then it's probably a good  idea to refinance because you could be paying a  

ton of money and interest because if you take the  exact same car loan of 25 000 over five years but  

you change the interest rate to 12 then you're  going to end up with a way higher monthly payment  

and you're going to end up paying over 8 000 in  interest when the life of the loan is done so you  

really want to pay attention to your interest rate  because now that same car is costing you about six  

thousand dollars more in interest just because  you have a twelve percent loan versus a three  

percent loan now if you do end up with a really  high interest rate and you want to refinance it  

to a lower interest rate most of the time you are  going to have to have a pretty good credit score  

so just keep that in mind if you're looking to get  a lower rate and in my opinion if you're looking  

for a really good rate then i would suggest going  with your local credit unions because a lot of the  

time they are going to have very competitive rates  or you can go ahead and check out lightstream auto  

loans i've got an affiliate link to them in the  description below which means i may be compensated  

if you click through it but they have got very  competitive rates for all different types of  

auto loans if you're interested in checking them  out now if you just happen to find this channel  

i'm jason with honest finance and i make a lot of  videos on different topics that'll give your life  

and your finances more value so if you do  have an interest in this type of content  

feel free to subscribe but thanks for  watching this video have a great day