What’s the difference between car loans and mortgages?
Q: Are car loan payments calculated differently than mortgage payments?
A: Monthly payments for some auto loans may not be calculated the same way a mortgage loan is.
For mortgages, the process of amortization is essentially a compounding method. A good way to think about mortgage amortization is that you don't have one single loan, but rather individual loans with terms of 360 months, then one for 359 months, then one for 358 months and so on, all strung together.
Each month sees a payment calculated with a smaller loan balance over the new shorter term, and while the total of the payment remains the same, the amount of interest you pay in a given month decreases while the amount of principal you pay increases.
This is a process known as "amortization." To determine your monthly mortgage payment over the life of your loan, be sure to check out our mortgage calculator.
On the other hand, installment loans--like a car loan--can either be:
- "Simple interest add-on" or
- "Simple interest amortizing"
Simple interest add-on loans: These are actually written as a single loan; all of the interest that will be due is calculated up front, added to the total of the loan as a finance charge, then that sum is divided over the number of months in the term to arrive at your monthly payment. Each payment consists of exactly the same amount of principal and interest, and as such, there's no savings to be had from prepaying these kinds of loans early.
Simple interest amortizing loans: These work like a mortgage, with a declining loan balance and declining term producing a constant monthly payment with changing compositions of principal and interest. Prepaying these can save you some money.
A loan to avoid
There can also still be loans based upon a thing called the "Rule of 78."
These are simple interest add-on loans with a twist; they are structured to have you pay the interest due on the loan first, then once that's done, your payments will cover the principal.
These should be avoided, since you end up "renting" money during the early years of the loan while your principal doesn't decline. If you should hold the loan to term, there is no difference in total cost when compared to a standard simple interest add-on loan, but if you should need to pay the loan off early, you'll find that you'll still owe most -- if not all -- of the original loan you took despite having made payments for some period of time.
Depending upon your kind of loan, you'll be able to use a standard amortization calculator... or not. Check your loan contract for details; if it is a "simple interest add-on" type, do a Google search for "simple interest calculator" and you should be able to find what you need.
More help from HSH.com
How to avoid a VA foreclosureIf you're in a VA mortgage and finding it increasingly difficult (or impossible) to make your mortgage payments, you'll need to take action if you want to keep your home from falling into foreclosure.
Weekly Mortgage Rates Radar 02/03/2016: Rate Declines ContinueHSH.com releases its latest Weekly Mortgage Rates Radar showing another decline in mortgage rates during the seven-day period ending February 2, as financial markets continue to react to soft data and the Federal Reserve's apparently more cautious position with regard to raising interest rates. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
HSH.com on the latest move by the Federal ReserveThe Federal Reserve decided today to increase the federal funds rate by one-quarter of a percentage point (0.25 percent).
Mortgage Rates Radar 1/26/16: Mortgage Rates Still FallingHSH.com releases its latest Weekly Mortgage Rates Radar showing that the month-long decline in mortgage rates continues during the seven-day period ending January 26, as the Federal Reserve again meets to discuss monetary policy and the state of the economy. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
HSH's Innovative Thinkers in Housing Economics 2016HSH.com's annual list of standout Innovators and Thinkers in real estate and housing economics.