How an auto loan payment is built

• Interest (dollars, rounded, printed on the cap)
• Principal

One rule, applied sixty times

A standard simple-interest auto loan charges interest on whatever you still owe, and nothing else. At 7% APR the monthly rate is 7 divided by 12, about 0.5833%. In month one you owe the full $25,000, so interest is $25,000 × 0.005833, or $145.83. The payment is fixed at $495.03, and whatever is left after interest, $349.20, comes off the balance.

Month two starts from $24,650.80. Interest on that is $143.80, so $351.23 goes to principal. The balance fell, so the next interest charge is smaller, so a little more of the next payment reaches principal, so the balance falls a little faster. Each statement looks almost identical to the one before it. The change is cumulative, and that is what the bars make visible: the blue cap is a thick lid at the start and a sliver at the end.

Where the fixed payment comes from

Nobody picks $495.03 by feel. It is the one level payment that brings the balance to exactly zero on the last scheduled month, given the rate and the term. The standard formula:

payment = P × r ÷ (1 − (1 + r)⁻ⁿ)

P is the amount borrowed, r the monthly rate, n the number of payments. Put in $25,000, 0.07 ÷ 12 and 60 and out comes $495.03. Change any input and the chart redraws itself. A higher rate thickens every blue cap. A longer term lowers the bars and stretches the row of them sideways, so the thick-capped early stretch lasts longer; that trade gets its own page, 36, 48, 60, 72, 84 months.

You can check any quote with a spreadsheet. =PMT(0.07/12, 60, -25000) returns 495.03, and swapping in your own rate, term and amount gives your own figure. If the payment a seller quotes is higher than what the formula returns for the same amount, rate and term, something else has been added to the amount financed, and it is worth finding out what.

One more thing the formula hides: in this loan, principal outweighs interest from the very first payment. That is a property of these particular inputs, not a law. Push the rate high enough, or the term long enough, and the early bars flip, with interest taking the larger share of each payment for months before the balance starts to move in earnest.

What the slide means for you

Add up the interest across all 60 payments and it comes to $4,701.80. Add up only the first 30 and you get $3,438.71, roughly 73% of the total, paid in the first half of the loan. The second half costs $1,263.09. That lopsidedness is the most useful single fact about an amortizing loan, and three practical things follow from it.

Extra money works hardest early. A dollar of extra principal sent in month three stops interest from accruing on that dollar for almost five years. The same dollar in month 55 saves close to nothing, because by then there is hardly any interest left to avoid. Whether spare cash belongs there at all is a separate question, taken branch by branch in paying a car loan off early.

Your balance trails your sense of progress. After 24 payments on this loan you have handed over $11,880.72, which is 40% of the $29,701.80 you will pay in all. But the balance is still $16,032.27, meaning you have cleared about 36% of what you borrowed. The gap between those two percentages is the interest front-loading at work. It matters the day you want to trade the car in early, because the car is worth what the market says while the payoff is whatever the schedule says. When the schedule moves slower than the car loses value, the shortfall tends to follow you into the next deal, which is the staircase described in rolling negative equity into the next loan.

The textbook shape wobbles in real life. Many simple-interest loans accrue interest daily rather than monthly, so the split on an actual statement shifts slightly depending on how many days passed since your last payment. And some contracts don't use simple interest at all. A precomputed-interest contract fixes the total finance charge at signing, and paying early may not save what the bars above suggest. Your contract says which method applies. If it isn't plain, ask the lender in writing before you plan around it.

Reading your own statement

Most loan statements, or the lender's online account page, break your last payment into an interest line and a principal line. Find that split for your most recent payment, then find it for the same month a year ago. The interest figure should be smaller now and the principal figure larger. If you have been making payments on time and the interest line has not budged, that is worth a phone call: either the loan is not built the way you assumed, or something is being applied somewhere you didn't expect.

The numbers on your statement will not match ours, since your rate, term and balance are your own. The shape should. Somewhere around the middle of your loan, the principal slice starts doing most of the work, and every payment after that point is mostly you buying back the car rather than renting the money.