Financing a car can seem intimidating, but it doesn’t have to be. There is no cookie-cutter answer, and you need to do what works best for your financial situation.
There are three main factors to consider when taking out an auto loan: the loan amount, the annual percentage rate (or APR), and the loan terms. What do these mean?
The Loan Amount:
The total amount you’re borrowing to purchase your vehicle. This amount can fluctuate depending on whether you are trading-in another vehicle or making a down payment. The down payment, or the money paid up-front when you buy a vehicle, directly affects your loan amount. For example, if your loan amount is initially $20,000 but you make a down payment of $2,000, that loan amount is now $18,000. If you negotiate the price of your car down or trade in a vehicle, the same model would apply because it’s taking an amount off of the total price of the car. Inversely, if you are trading in a vehicle on a car that you still owe money on, you might be adding to your loan if you also need to pay your trade in car loan off.
Annual Percentage Rate (APR):
This is the yearly interest rate you pay on your loan. Another way to think of this term is the cost you pay each year in exchange for borrowing money for your loan. APR is expressed as a percentage, usually ranging from 3% – 10%. To put things into perspective, the average APR for a car loan for a new car for an individual with excellent credit is 4.96%. The average APR for a new car loan for an individual with colorful credit is 18.21%. This percentage relies heavily on your own financial standing and credit, so it’s important to know your credit score so you’ll know what APR to expect before starting the car buying process. Other factors are the term length of the loan, and the type of car. Generally, new cars offer lower APRs while used cars are a bit higher.
The amount of time you have to pay back the loan. Typically, this is anywhere from 36-72 months. A longer loan term, like 72 months, means a lower monthly payment since there is more time to pay off the loan, but you’ll also pay more interest overtime. On the other hand, a shorter-term length would cause higher monthly payments, but your car would be paid off sooner with less interest building up each year. Some people will benefit more from longer terms and smaller monthly payments, and others will prefer to make higher monthly payments and pay the loan off more quickly. Once you understand the relationship between APR (interest) and loan terms you can better reach a decision that’s right for you.
Auto loans are not a one-size-fits-all decision, and you should do what works best for your specific financial situation. Use Alltru’s loan rate calculator to determine what kind of loan works best for you, or compare two different car loans.