How to calculate car loan payments?

Wednesday, August 12th, 2009 at 22:34

Joana asked:

My friend got a loan from Honda on a new Civic for 1.9% (several months ago), then realized the payments are caluclated exactly like a home mortgage (with higher interest and lower principle payments near the beginning). What is the normal formula for a car loan?

Additional Details
I'm guessing the mortgage method is useless to Friend because auto interest isn't tax deductible. Right?

Reply:

And order prescription drugs what other formula were you thinking of?

Simple interest and compound interest (simple interest is better) are the normal ways of calculating interest. The amount of interest each month is the amount due based on the amount of the loan remaining. Just like a house.

The only other formula is worse. It's the rule-of-78 method and it's still legal in half of the states. There they add up the interest you would have paid under the simple interest method, then allocate it based on a weighting that says you paid even more of the interest on the first month of the loan. Then if you pay off the car early, they make MORE than 1.9%.

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