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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.
Many types of installment loans use amortized interest, including auto loans, mortgages and debt consolidation loans. You may also encounter amortized interest on home equity loans.
Let’s say you took out an auto loan for $20,000 with an APR of 6 percent and a five-year repayment timeline. Here’s how you would calculate loan interest payments.
The calculation for "close-ended credit" (such as a home mortgage or auto loan) can be found here. For a fixed-rate mortgage, the APR is thus equal to its internal rate of return (or yield) under an assumption of zero prepayment and zero default.
Car purchases. The most common method of buying a car in the United States is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed (as opposed to being paid for in a lump sum with cash). [2] Roughly 30% of new vehicles during the same time period were leased.
An amortization schedule calculator is often used to adjust the loan amount until the monthly payments will fit comfortably into budget, and can vary the interest rate to see the difference a better rate might make in the kind of home or car one can afford.
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