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Basics of Car Loans

Purchasing a brand new car is a rather exciting experience for most of you. However, the trouble you have to go through before you can actually drive the car out of the dealer’s showroom is a major pain. One of the major areas to struggle is to get a suitable car loan. Most of you spend a lot of time doing extensive research on various brands of vehicles and their models. However, when it comes to car loans, very few of you do the level of research that it requires. It is very important for you to have a clear concept as to how cheap car loans actually work.

Factors That Affect Your Monthly Payment

Suitable car loans help you buy your dream vehicle. However, when it comes to paying out the loan in equal monthly installments, you may sometimes feel at a loss. There are three primary factors that can affect the total amount you need to pay and your monthly payment on your loan.

  • The Actual Loan Amount: The loan amount may be significantly less than the actual value of the car. This entirely depends upon whether you have opted to trade-in an existing vehicle or make a down payment.
  • The Yearly Percentage Rate: This is normally referred to as APR and it happens to be the effective interest rate that you need to pay on your loan amount.
  • The Term: This refers to the total amount of time that you need to pay back the amount of the loan. It normally ranges from 36 months to 72 months.

How Do These Factors Affect The Monthly Payment?

It is needless to say that everybody prefers to go for a lower monthly payment. However, it is also important that you look at the bigger picture. Even if you pay a lower monthly payment, it may mean that you are paying more than the actual value of the car over the life span of the car loan. Here is how these three factors can affect your monthly payment.

  • Lower Loan Amount: If you decide to buy a car costing $25000, you can easily bring down this value by negotiating the price of your car down or make a down payment of around $2000. If the APR is 3% and the loan terms if for 4 years, you need to get the loan of $23000. Making the down payment will bring down the monthly payment by approximately $44.27 in this example.
  • Lower APR: Keeping the same example in which the cost of the car was $25000 and the loan term was for 4 years, one lender provides an APR of 3% and the other of 2%. The latter will save you around $10.98 every month.
  • Longer Term: With the help of the above example, if the loan term is extended from 4 years to 5 years, keeping the APR at 3%, it will surely lower the monthly payment by almost $104.14. However, you will have to pay $391.85 more than the actual price of the car over the life of the loan in interested charges.
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