# How Does Auto Loan Interest Work?

19.08.2013

It is estimated that more than eighty percent of people buying cars do so by availing auto loans. Like any other loan, an auto loan also carries a rate of interest to be paid and has certain conditions attached to it. If you are also considering taking loan for buying a new or used car, you should know how does auto loan interest work.

Generally, interest on an auto loan is determined using formula of simple interest and not compound interest. That means you pay a monthly installment equal to the interest payable on the principal amount.

Basics

Usually auto loans are offered for a period of 36-72 months. As is the case with a home mortgage, an auto loan is payable by making regular monthly payments against the principal balance, depending on the duration of loan and the rate of interest.

Formula

You can calculate the total amount of interest to be paid for the term of loan by multiplying the rate of interest by the amount of original principal and multiplying the resultant by the term of the loan in years.

Function

The amount of initial installments that you pay would naturally have a higher proportion of interest than the subsequent installments. Every time you pay an installment, there is a corresponding reduction of the principal amount and hence the interest to be paid. If you can afford to pay more than the specified amount of principal, the total interest that you pay during the term of the loan gets reduced.

On knowing how does auto loan interest work, you are better prepared to estimate the amount of monthly installment you would be required to pay against your auto loan.