When you take a loan of whatever kind for example car loan you must pay back both the amount you borrowed plus interest on top.
Interest in simple terms is the additional fee you pay in order to be granted the loan for a certain period.
The repayments to be made on the loan are divided into two parts;
1. the part that reduces your balance to pay off the loan
2. the part covering the interest on the loan
FACTORS AFEECTING HOW MUCH INTEREST TO PAY
1. Principal Amount
This is the amount you are looking to borrow. Proper research should be done with personal consideration being taken up into the equation for example your budget, size of the family. This helps you to figure out the amount necessary to borrow.
2. The Loan Term
This is the period you will be given to repay the loan. Shorter loan terms have higher repayments but their advantage is they accrue less interest in the long run whereas longer term loans have lower monthly repayments but ultimately, accrue mere interest during the life of the loan.
3. Repayment Schedule
This is the periodic time that you will be given to ensure you make payments with options such as weekly or monthly payments. Make an informed decision based on your budgeting style because while more repayments result in less interest due to effects of compounding you should be able to meet the shorter time schedule that will be given.
4. Repayment Amount
Not all the money you pay in repayment goes towards paying off the loan. A portion will go towards paying the interest first and then the left over is used to reduce the loan principal. Because the principal determines the amount of interest to be paid, you need to know the amount you are making in repayments.
5. Interest rate
During calculation of your loan, remember to use the basic annual interest rate and not the comparison rate to get accurate numbers. This is because the comparison rate takes into account fees and charges as well as interest which means that when it is used a higher amount of interest will be obtained.
Calculating interest on the car loan
Use the following formula to calculate the interest;
1. Divide your interest rate by the number of payments to be made in the year (this because interest rates are expressed annually). This means that if monthly payments are being made then divide by 12.
2. Multiply this figure by the balance of your loan, which in case it is the first payment will be the whole principal amount.
The outcome is the amount of interest to paid in the first month.
For example a loan of Ksh 300,000 over a period of 6 years at 7% and making monthly repayments is calculated as follows;
(0.07÷12) X 300, 000 = 1, 750
Since you have begun to pay the principal, to calculate the interest to paid in the following months, you need to first calculate your new balance;
1. Subtract the interest you calculated from the mount you repaid. The result you get is the amount you have paid off the loan principal.
2. Minus this amount away from the original principal to find the new balance of the loan.
Amortization is an accounting technique that is used to periodically lower the book value of a loan or intangible asset over a given period of time. In terms of loans its main focus is on spreading out loan payments over time. Amortization is similar to depreciation when applied to an asset.
Visit carhubb to find the car that suits your needs and use our loan calculator to prepare the best plan.