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Auto loan interest is the cost of borrowing money to purchase a car. The lender will look at your credit score, debt-to-income ratio and other factors to determine what interest rate it offers.
The formula for calculating your loan payment depends on whether you choose an amortizing or interest-only loan. Examples of amortizing loans include car loans, mortgages and personal loans.
In 1935, Indiana legislators passed laws governing the interest paid on prepaid loans. The formula contained in this law, which determined the amount due to lenders, was called the "rule of 78" method. The reasoning behind this rule was as follows: A loan of $3000 can be broken into three $1000 payments, and a total interest of $60 into six.
Buying a car is a major financial commitment, and for most people, it involves taking out a loan. Along with the loan comes interest, which is the cost of borrowing money from a lender. Read Next:...
Converting an annual interest rate (that is to say, annual percentage yield or APY) to the monthly rate is not as simple as dividing by 12; see the formula and discussion in APR. However, if the rate is stated in terms of "APR" and not "annual interest rate", then dividing by 12 is an appropriate means of determining the monthly interest rate.
Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. [2] A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule.