Car loan amortization

[midori]

Hi there,

Not sure if this is the right forum to post this question, but I'm trying to figure out how I can finance a new CR-V. I was wondering if car loans are amortized like home loans, or do you just get charged the bank's rate and they divide that total by the number of months of the loan? I'd like to avoid trading in my Tacoma and would rather try to sell it to get a better price, so maybe I could take out a second loan that gets paid off early? Does anyone do this?

Thanks for any help!
BTW, I'm in California.

-Midori

[joeeew]

Hi Midori,

Great question. I'm in california too. I believe car loans are different from home loans. I may be wrong. Anyone have a better answer?

[geekmaster]

Car loans are amortized like home loans. Most of the large auto web sites will let you plug in the APR and amount financed to see what your monthly payment will be.

[midori]

I know that you can use a loan calculator to figure out your monthly payment, but that doesn't mean that you'll save yourself from paying some interest by paying off the loan early. I thought that when I bought my Tacoma and paid it off early, I didn't save myself anything financially. I think they just calculated the APR and divided that total by the number of months. I didn't think car loans were amortized like home loans.

I was then confused this morning when I saw a car loan calculator on bankrate.com that showed what happens to your payments if you make an extra payment or add a little extra to your monthly payment.

Thanks!

[joeeew]

I was told that if you pay your car loan off earlier, it would save you from paying as much interest. Lets say you have a 5 year loan and the total interest was $2500. If you pay off the car in 2 years, theres no way you would be paying $2500 in interest, correct?

But I believe that is how home loans work also, if you pay extra each month and you pay off your mortgage quicker, you save from paying all the interest.

So, how is it different???

[2RedV's]

It depends upon how the loan was structured to begin with. If it is a simple interest loan, you are in luck. It is is one of the nasty "Rule of 78's" loans, you may be better off to continue paying it than to pay it off early because of how the interest gets charged to the loan.

[midori]

I called my credit union to find out how they calculate the interest. They said that I'll pay less interest if I pay off the loan early, similar to a home loan. I questioned whether or not it would save me any money to pay early because my loan from Toyota Financial Services wasn't calculated that way. I paid off early and got no savings. Yet another reason why my next car won't be a Toyota... :)

Thanks for your help!

[geekmaster]

Just because you buy a Toyota (or Honda) doesn't mean you need to use their financial services for a loan. So you should buy a car on the merits of the car. The same goes for the financial aspect of the purchase. Finance with the outfit of your choice -- and always read the contract. You should always be able to get a loan that doesn't have a prepayment penalty (i.e. it should save you interest by paying early). In fact, in many states, it's illegal for a company to collect the full interest on the loan when it is paid off early.

Also, even with Rule of 78's (as compared to the actuarial method), when you pay off a loan early, you still avoid paying the full interest. It's just that the Rule of 78's method earns interest on the loan faster (i.e. more at the beginning and less at the end of the loan).

[midori]

I went with Toyota Financial Services because they offered me 2.9%, which was much lower than my credit union. It was also my first new car purchase, so I didn't know any better.

I'm also not getting another Toyota because I hate the local dealer's service department, which you see quite a bit when you own a car that doesn't have the "no scheduled maintenance for 100k miles" that Honda has.

Granted, these aren't qualities of the car, but they're still things to keep in mind when doing business with a company. The RAV4 isn't better than the CR-V to me. If the difference was great, I might consider getting the RAV4. But since I'm willing to pay a little bit more for a book if the bookseller gives me outstanding service, I might as well have a similar mentality when spending thousands of dollars.

Also, if I were in the market for another truck, I'd probably get another Tacoma. :)

[geekmaster]

Ahh ... the picture is clearer now. I am still confused as to what happened with your Toyota loan payoff. Are you saying that although you paid off the loan early, you still had to pay the full interest on the loan as if you had not paid early?

[midori]

Yeah, that's what happened with my Toyota loan. I never had to call them for a final payoff amount. I just got a bad loan. But I still don't regret it because I really like my truck and 2.9% was a great deal.