Well you should be, and here's why.
Let's take a look at a standard 60-month, or five year, auto loan. The original loan amount is $15,790.59, interest rate is pretty good at 4.99%, and the payments are reasonable, $298.53 per month. Not a bad deal at all! You can afford those payments, right? As you can see in Example 1 (below) Amortization Schedule, column C is Payments, Column D is Interest, Column E is Principal, and Column F is the Balance after each monthly payment. The amount applied to Interest decreases, and the amount applied to Principal increases with each payment, as it should. What you need to pay attention to is the fact that once you're done paying off this loan your $15,790.59 loan is actually $17,911.80, a difference of $2,121.21 which is the total interest.
You might ask, well how can I reduce the total interest paid? That's a lot of money going in to the banks coffers! There is something you can do and it's a matter of planning ahead before you even start looking for a vehicle.
1. Never, make a spontaneous decision when buying a car. Do some homework first, take in to consideration your total monthly income, cost of living expenses, in a realistic manner. Make sure you factor in every expense, rent, utilities, food, child care, and (if you have them) pet care. Look at your bank and credit card statements, those are a very good resource to research your monthly expenses.
2. Get pre-approved for your loan through your bank. If you have a long established history with your bank, you're more likely to get a good interest rate with them, rather than a finance company the car dealership uses.
3. If your credit history is less than favorable, the dealership will apply through several different loan companies until they find one that will accept your loan. Every time they submit a request to these loan companies, the loan company runs a check on your credit, and your credit score takes a hit and gets lowered. Every company that declines your loan, lowers your credit score! Don't fall in to that trap! Take it upon yourself to print out your credit score and history from the reporting agencies. This will not only save time, but it will save your credit score! The last thing you need, or want, is for your credit score to get lower just because you're trying to purchase a car! The dealership, if you chose to finance through them, can submit the print outs you brought with you, to the loan company, rather than the loan companies making inquiries.
4. Here's the biggest one, make sure your loan payments fit comfortably within your budget. The main reason for this is on Example 2 (below) of the Loan Amortization. If you make a larger payment each month than what's required, it will decrease the amount you pay in interest, and shorten the term of the loan! In Example 2 of the Loan Amortization the first payment made on the loan is $1,000.00 instead of $298.53, which lowered the interest by $233.23. That's an extreme example for most people but, if you make a payment of $325.00 each month instead of the basic payment, you're reducing the principal by $26.47 a month. By law any over payment must be applied to the principal first, thus reducing interest as well, if it's compounded monthly as in these examples. The savings to you is very good.
Sometimes we all have the best intentions but, some months you can't make a larger payment. That's okay, just remember every little bit helps, and a savings of even $300.00 is better than no savings. The same rules apply to your home mortgage as well. If you can pay just an extra $25.00 per month, that's $300.00 per year. Over a 30-year loan that's a savings of over $9,000.00!