What a Car Loan Costs
Gearing up to get a car loan is the key to getting wheels.
BUYING VERSUS LEASINGWhen you're shopping for a car loan, remember that what it costs you to borrow depends on three things:
- The finance charge, expressed as an annual percentage rate (APR)
- The term, or length of time the loan will last
- The principal, or amount you borrow
THE APRThe APR is a percentage of the loan principal that you must pay to your credit union, bank, or other lender every year to finance the purchase of your car. This finance charge includes interest and any fees for arranging the loan. The charge gets added to the amount you borrow, and you repay the combined total, typically in monthly installments over the course of the term.
THE TERMThe term of your loan also affects what it costs you to borrow. A shorter term means higher monthly payments but a lower total cost. On the flip side, a longer term means smaller monthly payments and a higher total cost.
Sometimes, though, you still might choose the longer term, and the higher cost, if you can manage the smaller payment more easily than the larger one. After all, it can be worth it to pay a little more over time if you're worried that you might default on your payments.
But keep in mind that a car might start to cost you money for upkeep after it reaches a certain age. You don't want to choose so long a term for your car loan that you'll still be paying it off while also having to pay for major repairs.
THE PRINCIPALIt should come as no surprise that the more you borrow, the more borrowing will cost. After all, the finance charge is determined by multiplying the interest rate times the principal. So the more you can reduce your principal, the more affordable borrowing will be.
One thing you can do to cut down your overall cost is to make the largest down payment you can afford so that you reduce your interest costs. Looking for a car that will have a good trade-in value, and trading it in while it's still in good condition, will help you save money later on as well.
NOT-SO-HIDDEN COSTSWhen you're shopping for a car, you have to take costs beyond the sale price into consideration. You'll be responsible for sales tax on the full amount of the purchase, fees for the title and registration, and insurance payments. And each of the 50 states requires you to have car insurance in order to get a loan. In fact, you can't get a loan without it.
Keep in mind that the cost of insurance will vary depending on the kind of car you want to buy, your age, gender, driving record, where you live, the insurance company you choose, and the coverage you want. To get a sense of what you'll have to spend, hop online and check out car-related or insurance websites.