When the average person buys a new car, they finance it using an auto loan. Auto loans are a way to obtain the car today and pay for it over an extended period, anywhere from 36 to 84 months depending on the loan. It benefits you, because you get to drive your new car off the lot. It benefits whoever finances your loan, because they get the cost of the car plus interest.
However, when you obtain a car loan, you need to be very sure you understand the loan terms: vehicle price, interest rate, length of loan, down payment, monthly payment, and any additional fees (referred to as add-ons). The specific terms of your loan depend on factors such as your income and credit history.
How Is Auto Loan Interest Rates and Length of Loan Calculated?
The interest rate influences the length of your auto loan. A typical auto loan will run 48 to 60 months; however, you can find them for as short as 36 months and for as long as 84 months.
The longer your loan the lower your monthly payments and the higher your finance charges over the life of the loan. For instance, while interest rates are more expensive on a 48- or 60-month loan, the monthly payment is lower. Conversely, a 36-month loan requires higher monthly payments, but allows you to pay off the contract faster.
And don’t forget about the annual percentage rate (APR). It’s the rate of interest over the course of a year. Simply put, if you borrow $100 at 5% for one month, your APR is 80% ($100 + 5% = 1.05, but extended over 12 months = 1.7958).
How Is Auto Loan Down Payments and Monthly Payments Calculated?
If you can’t pay cash for a new car (and how many people can these days?), then try to have a healthy down payment. This will lower the amount of the loan you need to finance and make your monthly payments lower.
Auto loans are secured, fixed rate loans. Your monthly payment remains the same throughout the life of the loan. However, while at the beginning of your loan your payment primarily goes to pay the interest, near the end of the loan more goes to paying the principal.
Additionally, your car is collateral. Should you default – not make your monthly payments – the dealer will repossess your car.
Things To Know About Auto Loan Add-Ons
Sometimes new buyers forget that in addition to the cost of the car, there are other fees calculated into the price. In addition to taxes, these fees may include registration, destination, and title transfer.
Other add-ons that increase the price of your car loan are dealer-installed options and special extended warranties. Think very carefully before agreeing to items you can do without or pick up somewhere else.
And be very careful about special considerations. You don’t always get a good deal by using them. Cash rebates and low- or zero-percent interest rates usually mean you lose out somewhere else.
First, you generally can’t use these special considerations together. It’s one or the other. Second, you generally have to give something to get something. For instance, a lower interest rate means a shorter-term loan with higher monthly payments.
Auto Loans For Bad Credit – Tips Before Taking A Car Loan
In order to purchase a new car, your lender will run a credit report. However, experts warn against allowing just anyone to run your credit report because it can decrease your credit score.
If you are not financing your car through the dealership, they have no need to check your credit. Even if they say it is their policy, don’t let them. They don’t need it to sell you a car.
Speaking of financing, before you shop for a car, shop for an auto loan. Pre-approval allows you to know what you can afford, saves you the time and hassle of finding financing after the fact, and gives you a bargaining edge when you enter the dealership.
Auto Loan Calculators
There are several auto loan calculators available today that you can use to calculate loan rates from different companies. Make sure that you are looking at the right companies because, we’ve found that some of these calculators, though accurate, will not give you the final rate you’ll get when approached at the banks.
Five Tips Before Buying A New Car On Auto Loans
- Check your credit report
- Know the maximum amount you can afford
- Determine what your trade-in is worth
- Shop around and find the best auto loan terms
- Shop around and find the best car price
Buying a new car just takes a little time and patience. Remember, it is all about finding the best car loan for you.