There are several ways you can lower the balance of your car loan. Consider reducing the balance of your car loan by paying some or all of it earlier. You can also reduce your car loan balance by selling the car while you are still paying the loan installments, or you can trade in your car. Some people pay down the loan because they want to get rid of the debt. It also helps to reduce the interest charges.
Pay Down
While paying off a car loan, you have a set number of months to pay off the loan. Each monthly payment includes a portion of the principal and interest. The payment sum is the same every month.
The principal and interest amounts that are being paid off are calculated separately. Consider making a principal payment. This will help reduce the principal balance on which the interest is being charged, and your car loan will get paid off faster. If you receive any additional funds, such as a pay bonus, consider paying this amount towards your loan. You can opt to make it a principal only payment.
Financial Hardship
If you are in tough financial straits, and are finding it difficult to make your monthly car payment, you can talk to your auto loan provider about reducing the loan's principal to avoid a loan default. Approach the car loan provider with your financial papers, showing your monthly incoming and outgoing statements. This includes all your loans and debts, along with a copy of your latest paychecks. Talk to the loan provider about your circumstances, and ask him for advice. After reviewing your documents, the lender may approve your request. He would then have you sign a new agreement that specifies how much money you owe every month. Ensure that you can pay this monthly amount. In case the lender does not approve your request, you can ask him to lengthen the term of the loan or reduce the interest rate.
Sell the Car
If you have not paid your loan in full, you can also sell the car loan balance. You need to talk to your auto loan provider about closing the loan. You also have to obtain a lien release, which states that there are no outstanding loans on your car. If it is possible for you to obtain the lien, the car sale can be conducted at the institution that holds the car lien. You pay off the loan with the proceeds from the car sale, and sign over the title to the new owner. If the lien holder is not available, you can take the bill of sale to the DMV, so the new buyer is provided with a temporary operating permit to operate the car. Once the car loan has been paid off, the car title can be sent to the new buyer.
Car Trade
You can also trade the car loan balance. The dealer will pay off the loan and apply the sales proceeds of the first car that you are trading in for your new car.
Figuring out the balance of a car loan can be tricky. However, there are 2 ways of determining the balance. One method is to use a car loan balance calculator, available on the Internet. The other method requires some basic mathematics.
Online Calculator
Most online calculators ask for the required amounts: principal, interest rate, down payment and the time frame (term) in either months or years. Simply enter the amounts into the proper fields, and the calculator will do the math.
There is another online calculator available when selling your car. This one calculates the sell amount of a car loan balance. Enter the amounts as stated above, but include the amount that the car is now worth.
Basic Math
If you don't have Internet access, or prefer to figure out the balance of the car loan by hand, use the following formula:
B=A(1+i)n-P/i [(1+i)n-1]
"B" represents the balance you're seeking. "A" is the loan amount. "n" is the number of payments you have to make (the number of months the loan is for). "i" represents the interest rate, and "P" your monthly payment. If you have a scientific or graphing calculator handy, you can plug these figures in and attain an answer.
Step #1
Calculate the monthly interest rate. Determine how the lender is compounding the interest on your loan (listed on your loan documents). Divide the annual interest rate by 1200, to determine the monthly interest rate. For example, if your interest rate is 10 percent, divide 10 by 1200, which equals 0.008.
Step #2
Deduct the down payment. Subtract any down payment from the original price of the car. Be sure to add any fees, such as registration, to the original price before subtracting the down payment. This is your original principal amount of the loan.
Step #3
Determine the principal amount. Multiply the principal amount in step #2 by the monthly interest calculated in step #1. Deduct this amount from your monthly payment. This is the principal portion applied to the car loan. This changes each month. At the beginning of the loan, you will be paying more toward the interest portion of the loan than the principal amount. As the loan ages, the opposite will become true, paying more toward the principle amount and less toward the interest portion.
Step #4
Factor in any additional payments. If you pay more than the monthly car payment that is due, inform the lender that you want that applied to the principal amount and not the interest portion. This will accelerate the time it takes to pay off the car loan. If you do not inform the lender, most often the lender will apply it toward the interest portion of the loan, which does not save you money.
Step #5
Recalculate the principal. Calculate the extra principal amount paid in step #4 and multiply that number by the number of months paid. This will give you your new principal amount.
Step #6
Add it all up. Add the extra principal paid in step #5 and the regular principal amount in step #3. This is the total principal amount paid. Deduct this from your original car loan amount, and you will have determined the balance left on the loan. Be aware that this is not the total you will owe the lender, since interest will still accumulate until the loan is completely paid. However, this will determine the amount due if you were to pay the loan off in full at the time.
Understanding How Much Interest You Really Pay
The principal balance of your car loan is how much you owe on your car loan. On top of the principal, you will be paying interest on the loan as well. Depending on when and who you financed with, you can be paying as little as 0 percent or as much as 10 to 15 percent interest per year. The quicker you pay off your principal, the less interest you will pay. The interest is determined every time your principal balance changes. You have to pay off the entire principal no matter what.
Look at it this way, if you get a car loan over 5 years, or 60 months, you will be paying a lot in interest with lower monthly payments. You are paying less of the principal, and causing more interest to be added in. If you get a loan for 3 years instead, you will have a higher monthly payment. However, more of that will be principal compared to interest. The faster your principal goes down, the lower the amount of interest you have to pay. If you have a longer loan period, you may have locked in a good interest rate. However, you may be able to get a better rate now, for reasons such as having better credit. It may be in your best interest to refinance your loan, so you can pay less interest on your remaining principal. Refinancing can save you potentially thousands of dollars.
