What You Need to Know About Auto Loans
A lower payment every month towards your car loan doesn’t necessarily mean you’re saving. Read more to learn how car loans work.
Buying a new vehicle means taking out a car loan. If you’re looking for a new car, you might’ve spent a lot of time researching options, but have you researched car loans? When you take out an auto loan from any financial institution, you get your money in a lump sum and pay it back over time along with interest. Your interest rate, how much time you take to pay it back, and how much you borrow affect the amount you’re needed to pay each month. The 3 major factors that affect both the total amount you’ll pay on your loan and your monthly payment are as follows:
The loan amount: Depending on whether you’re making a down payment and/or you have a trade-in vehicle, the loan amount can be significantly less than the car’s value.
The annual percentage rate: Also known as the APR, this is the effective rate of interest you’re required to pay on your loan.
The loan term: This is the time you have to pay back the borrowed amount, usually 36-72 months.
Even though a lower monthly payment sounds nice, it’s crucial to consider the bigger financial picture. A lower payment could also mean that you may be paying more for the car over the term of your loan. Here’s how adjusting each of the above-mentioned factors can affect your monthly payment:
A lower loan amount: Consider a $25,000 auto loan, where you negotiate the price of the car down by $2,000 or make a $2,000 down payment. Now, your loan amount is $23,000, and assuming a 4-year term with a 3.00% APR, you’ll save about $44.27 per month.
A lower APR: Assume a 4-year term and the same $25,000 auto loan. One financial institution provides a 2.00% APR and another offers a 3.00% APR. choosing the one with the lower APR will help you save about $10.98 every month.
A longer loan term: If you extend a $25,000 loan from 4 years to 5 years and assume a 3.00% APR, you will lower your monthly payment by about $104.14. However, over the life of the loan, you’ll end up paying $391.85 more towards interest charges.