Auto loan debt is, simply put, the amount of money a person owes toward an auto loan. This includes principle (the amount of the original loan that is still owed) and interest (the finance charges that the loan company charges on the remaining principal). Interest rates can vary greatly, depending on who the auto loan is through. Banks generally have lower interest rates but require a better credit score for approval. Major auto loan companies (GMAC, Capital One Auto Finance, etc.) have higher interest rates but require lower initial credit scores.
How does auto loan debt work?
Like most other loans, auto loan debt is paid interest first. Meaning when you make a payment, the interest that has accrued for the month is deducted first and the rest of the payment is them applied to the principal. As an example: a monthly payment of $300.00 is due on the first day of the month. If the interest that is due is $125.00 that would mean that $175.00 would be put to principal. So if the beginning balance for that month was $5000.00, the new balance would be $4825.00 ($5000.00-$175.00).
The money that is paid to interest is paid to the loan company for having the loan. As the Loan term goes on, the amount paid towards the interest goes down and the amount paid towards the principal goes up because the overall principle of the loan has decreased.
In the previous scenario, the first month interest would be charged on $5000.00. After the payment, interest is charged on $4825.00, because interest can only be charged on money that is still owed.
How to get out of auto loan debt on your own?
The easiest and most straightforward way to get out of debt is to add any extra money that can be allocated to the loan to the payment amount. Since the interest is taken out first, any extra money goes to principal. For example, if the payment owed is $300.00 and $125.00 goes to interest, $175.00 goes to principal. If the amount of the payment is increased by $25.00, that extra money goes against the actual amount left on the loan. So, instead of having a balance of $4825.00 the next month, the balance would be $4800.00. This also means that the interest for the next month would be reduced because they can only charge interest on what is owed.
How to pay off auto loan debt fast?
A quick approach to paying off auto loan debt is to increase the payment by the amount of interest owed for the month. If the interest owed is $125.00, and the payment is $300.00, by paying a total of $425.00 it is insured that $300.00 comes off of the principal of the loan. Also, using this method, the payment would decrease every month because the interest decreases as the total loan amount does. Using our previous scenario, interest would decrease by $7.50 every month, and the loan would be paid off on half the time.
Source: http://www.personalfinanceplanning.org/how-does-auto-loan-debt-work-and-how-can-i-pay-it-off-fast/
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