How to Calculate Interest on Car Loans
Most car loans are given on a precomputed interested rate basis in which the bank has already calculated how much interest will be repaid. Pay a car loan off early to get a refund with help from a financial specialist in this free video on interest rates and loans.
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Hi, this is Matt McKillen with Innovative Financial Group. The question posed to me today is how do you calculate interest on a car loan? Well most car loans are on what's called a precomputed interest rate basis which means that let's say it's a 5 year term, the bank has already calculated exactly how much interest you're going to repay them over the life of a loan. In doing so, for example, if you pay your car loan off early a lot of times what they'll do is they'll actually refund you back a portion of that precomputed interest that was added to your mortgage or to your car loan in the beginning. So for example if you took a 10,000 dollar car loan that's precomputed, they may add 5,000 dollars to the balance of that knowing that that interest is already factored in. So if you pay the loan off before the 5 years is up, they will actually refund that off the balance of the car loan. So that's one way you can kind of calculate where you are on your loan and how much interest that you're paying. Most other institutions just do straight interest bearing loans which means you just borrow the money as you use it which means every month you pay based on the rate of interest, a finance charge. Again, if you pay that loan off early, then you would save the long term interest if it's for 5 years and you pay it off in 2. My name is Matt McKillen, I'm with Innovative Financial Group.