Understanding APR and car loan

[mantle004]

Hello. Just bought a new car today (Ford for those that are wondering). Yippie! I bought it for $27k out the door with $5k down. The APR on the car is 2.9% for 48 months.

Financed: $22,000
APR: 2.9%
Period: 48 months

So I'm just running the math now to see how all this was calculated (I like to test my brain mathematically).

What I don't understand right now is part of the "Federal Truth In Lending Disclosure" box on my invoice receipt. It says that the "Finance Charge (The dollar amount the credit will cost you)" is $1,351.52

It also lists that my monthly payments will be $486.49. How did they come up with this number. Shouldn't it be $22000/48 x 1.029 = monthly payment?

Its not a question of affordability (well below what I was expecting to pay), I just don't understand how $1,351.52 comes out from 2.9% of $22,000.

If anyone could shed some light on this, that would be great!!

[elessar78]

Amortization calculator - Wikipedia, the free encyclopedia

although this will probably be more darkness than light.

[mantle004]

I mostly get the derivation and all, but why didn't they (the financiers) just say...hey, you are borrowing $22,000 from us, we'll charge you 6.143% interest on that so that you will be an additional $1,351.52. Borrowing for 48-months, that'll make your payments $486.49 per month.

That just seems so much easier to say. The APR doesn't make sense at all in this loan to me. Nowhere was that 6.143% interest discussed in the terms of the loan.

The 2.9% is very confusing in this case.

Any other way to explain it?

[snshijuptr]

APR is the ANNUAL percentage rate. This means if you pay off the loan quicker you will be charged less over all, but still 2.9% for every year. APR and APY are a standard measure of the interest so that loans and investments of different years can be compared. It also standardizes constant, monthly, and yearly compounding. You can now easily say that you 2.9% loan is costing more than a 2.4% cd would earn or costs less than a 6% mortgage costs at any point in time.

[dannin]

APR: is a measure of the cost of credit on a yearly basis.

This is used to help standardize the use of the term percentage rate. Suppose you put $1,000 into two banks and each said they're going to give you 10% annual interest.

The first bank pays interest out every month. At the end of January, you would have $1,008.33 ( $1,000 + ( $1,000 * .1 /12months) ). Then at the end of February you would have $1,016.73 ( $1,008.33 + ( $1,008.33 * .1 / 12months ) ). And so on. As you can see, this example demonstrates compounding. For simplicity, I'm just assuming 1/12 of the yearly interest per month, instead of using the daily rate. At the end of the year you would have about $1,104.71 in your account. As you can see, this is an APR of 10.47%.

Now if bank two just paid you one time at the end of the year, your account would have $1,100 in it. This would be and APR of 10%. APR serves as a way to standardize the interest rate so that consumers will know the real rate being charged / returned.

[dannin]

I think I see where you're getting the 6.143% number ( 1351.52 / 22,000 ). That number is just a percentage of the amount borrowed that you'll pay in interest over the 4 years of the loan. The calculations used are not so simple to work.

If you go to BankRate dot com and click on calculators, then click on "Auto Calculator" then click on 'Auto loan calculator (includes amortization schedule)" you should see the input form.

Plug your numbers in and click the "Show/Calculate Amortization Table" button you will see how much of your payment is going towards principal and how much is going towards interest. The first month, you are paying interest on the full amount, $22,000.
22,000 * .029 = 638
638 / 12 months = 53.17 interest for the first month

After you make your payment you have a balance of $21,567.18 left.

If you go forward a year in time, you will see that the principal has come down to $16,736.60. So the interest for that period would be less than the April the previous year.

Apparently the percentage rate they're using isn't the APR so the numbers shown on this table don't match up exactly to yours, but I hope they are similar enough for you to get the idea of what's going on.

Hopefully this helped a little and didn't just confuse you even more!

[PaydayLoner]

I mostly get the derivation and all, but why didn't they (the financiers) just say...hey, you are borrowing $22,000 from us, we'll charge you 6.143% interest on that so that you will be an additional $1,351.52. Borrowing for 48-months, that'll make your payments $486.49 per month.

It's because you both need to agree on how much interest you'd pay, if you decided to pay the loan back early. If you made higher payments each month, or paid it off in a lump sum before 48 months, the 6.143% would be different.

It actually works in your favor. If they stated it as a single total percentage or a dollar amount, you'd be stuck paying the additional $1,351.52 no matter how soon you paid off the loan. By calculating what you're paying as an annual interest rate, you pay less if you pay the loan back sooner (assuming they don't have some separate early-payment penalty).

[fe2o3ez]

What do the terms of the agreement say? Is the Finance charge compounding daily? or on an average daily balance once a month?

[AlFromLA]

does it help if i make two car payments each month instead of one? both half of the min

for example if my car payment is $500, will it be better if i make two $250 payments? or no?

[dannin]

If the interest is compounding on a daily basis, then it would probably slightly help you. But, the difference will be very slight and probably not worth the extra hassle of sending payment in more often.

[coach2wealth]

Here is an idea. Pay cash for a used car. Make the payments to yourself. Sell the car in 18-24 months for pretty close to what you paid for it. Take that cash and half the cash in your car fund and move up. Repeat this process and before you know it you'll have tons of cash and drive any car you want.