Most people who own cars want to repay their loans as soon as possible. However, how they repay a car loan will affect how quickly they can get rid of it. This article explains the most common types of car loans, how they’re repaid and what factors you might want to consider when deciding which one suits your needs best.
Flat interest
A flat interest rate is the simplest type of car loan repayment. In a flat interest rate payment plan, your monthly payment will not change over the life of your loan. The interest rate on your vehicle loan will be fixed for its duration, and you’ll make one or two payments at a time. In addition, your lender may charge additional fees for keeping this type of payment plan in place, but it’s not common practice to do so when it comes to auto loans.
Declining balance
The most common type of car loan repayment is a simple declining balance. You pay the same amount towards your loan each month until it’s paid off. Over time, the amount you repay each month will decrease as it becomes smaller than the outstanding balance on your loan.
The amount depends on two things; 1) The monthly interest rate charged by your lender and 2) The total value of your car loan. Your monthly payment will be calculated based on these two factors and divided into equal payments over your contract term.
Reverse Amortization
Reverse car loan amortization occurs when you pay more interest than principal. You’re essentially paying for the money borrowed plus additional charges over time. A reverse amortization loan is also known as a “negative amortization loan,” It results in negative equity where your balance increases due to interest charges rather than decreases due to principal payments.
According to Lantern by SoFi experts, “Amortization refers to the process of paying off a loan (a car loan or any other kind of loan) according to a predetermined schedule. When a loan follows an amortization schedule, the payments are divided between the principal owed and the finance charges.”
The borrower pays more interest than the loan rate because they take out more money than they need, so they have to pay interest on their excess borrowing (or margin).
Revolving amortization
Revolving loans impose an amortization schedule, a payment schedule designed to pay off the loan in equal instalments. The amount of these equal instalments is determined by dividing the total amount owed on your car into equal monthly payments. Each monthly payment pays off both interest and principal, so you never get rid of any money. The total amount owed on your car will decrease each month as more principal payments are applied to it, but it will never reach zero because there will always be some unpaid interest from previous months.
Hopefully, you have enjoyed learning about the different types of car loans. If you are considering getting a new or used car, take some time to consider all your options before making a final decision.
