Car loans, like most loans, are paid month by month over a set period of time until the balance hits zero. A car loan amortization is simply a listing of those payments, calculated to show the “life of the loan.” From first payment to last, it shows payments applied and how the loan balance keeps reducing. The last line of the amortization shows that happy day when the final payment is made, the balance is $0, and the loan is completely paid off.
The basics of car loan amortization
Your car loan amortization will show each individual payment and a running balance. However, an amortization also provides a key detail beyond just the payment amount. The amortization breaks the payment down into two distinct portions that will be applied to the amount owed. One portion of the payment is applied to interest owed, the other portion is applied to the loan principal. Here are some basic definitions to keep in mind.
- Principal: The amount borrowed from your lender, or a portion of that amount.
- Interest: The amount you pay each month to borrow money.
Rather than just showing you a simple payment amount, an amortization shows how much of each payment is going toward principal and how much toward interest. So in the line-by-line “life of the loan,” a car loan amortization will generally show all of the following details:
- Payment number according to number of months in the loan term, from 1 to 84 months or more
- Payment amount
- Amount applied to principal
- Amount applied to interest
- Total remaining balance
Simple interest and car loan amortization
A simple interest loan is a common type of financing under which the borrower pays interest each month, but only on the previous month’s remaining balance of the loan. As payments are applied to principal, interest is calculated on a smaller remaining balance each month, so the amount of interest due each month is also reduced.
This chart shows a car loan amortization for a simple interest loan. Scroll down and click on the “monthly schedule” tab. Notice how the total remaining balance goes down from month to month, as you’d expect. But notice, too, what’s happening in the principal and interest columns. Each month the amount applied to principal increases and the amount applied to interest decreases.
This is a result of the calculation method used. The payment remains the same, but because interest is determined each month on an ever-decreasing loan balance, less and less of each payment goes to interest while more and more goes to principal. With this calculation method, you may pay less interest on a simple interest loan than on other kinds of financing, depending on interest rate.
Your car loan amortization shows how your loan is paid back over time. If you have a simple interest loan the schedule shows how the amount of your outstanding balance is reduced, and how more of your payment will go toward your principal instead of your interest over the life of your loan, until you owe nothing at all.