When you want to buy a new car but are short of cash, consider a auto loan. Before you apply for a loan, it’s important to measure your ability to pay. This will determine whether you can afford to pay your car loan. There are 3 indicators that help you determine whether you can afford an auto loan.
3 indicators to calculate an auto loan
To fully understand the loan process, you need to learn and understand what the terms of the loan mean. There are 3 basic factors to calculate an auto loan:
- Loan principal
- Interest rate
- Loan term
Through these 3 indicators, you will be able to find out how much you can get out of a loan and how much you will have to pay each month.
1. Loan principal
Loan principal is a financial term to refer to the original amount of the department or borrowed. And when you calculate a car loan, the loan principal is the amount you borrowed initially.
Your total interest expense at the end of the loan depends on the amount of the loan principal and the term of the loan. So the more principal you borrow, the more money you will eventually repay in the course of the loan.
But with each monthly payment, the total loan principal will gradually decrease until the balance is paid off. During this period, interest payments will decrease as the total principal of the loan decreases.
What you need to know is that a large percentage of your monthly payments in the first few months is to repay interest costs. Only a small percentage is to repay the principal of the loan. This is most common in amortization loans. As the loan matures, more money will to repay the principal and less to pay interest on the loan. This process continues until the remaining principal balance is paid off.
2. Interest rates
The interest rate usually expressed as a percentage. It is the amount charged in addition to the principal of the loan. So the lower the interest rate, the lower your monthly payment.
3. Loan term
Loan term refers to the life cycle of the loan, that is, the length of time the borrower agrees to repay the lender. The longer the loan, the more total interest paid, and the higher the cost of the loan.
Where do you find the 3 indicators?
Most online lenders have a simple auto loan calculator on their websites that will help you with your calculations. You can also call the lender, tell him how much you need to borrow and how long you will be borrowing, and ask them what the interest rate is.
Most lenders will let you borrow as much as you can in order to make more money. These auto loan calculations give you an estimate of the total cost, which you can use to compare with your total income. This will help you determine how much you can afford.
Be aware of these 3 indicators and take advantage of the auto loan calculator so you will enjoy driving a new car without worrying about debt.
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