When you’re considering getting a car loan, you may be surprised to learn that the interest rate isn’t the only number you need to pay attention to. It may not even be the most important one.
Interest rates on car loans are typically much higher than other loans, like home equity loans or mortgages. This is because car loans are considered consumable goods – things that have an expected lifespan and can easily be sold or disposed of if something goes wrong with them.
Common Terms Used in Auto Loan Promotions
Variable Interest Rate: A variable interest rate can change over time based on an index such as a prime rate or a LIBOR index.
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Balloon Payment: A balloon payment is a lump sum that borrowers must pay at a certain time.
Co-signer: A co-signer is a person who signs a loan or lease agreement in addition to you. This person is also responsible for paying back your debt if you don’t.
Pre-payment Penalty: A pre-payment penalty is a fee you must pay if you pay off your loan or lease early.
Lease: A lease is a contract between you and a car dealership that allows you to use a vehicle for an agreed-upon period.
Loan Term: This is how long you have to pay back your auto loan or lease.
APR: APR stands for annual percentage rate, which measures how much interest you will pay over time. The higher your APR, the more interest you will end up paying.
How to Calculate APR On a Car Loan
According to experts at Lantern Credit by SoFi, “APR is a better metric for gauging the cost of borrowing than the interest rate alone.” An APR takes your interest rate and calculates it over a year. Some people mistakenly think they’re getting a better deal by opting for longer loan terms or lower monthly payments when it comes time to pay off their car. However, it all adds up over time.
It may sound simple, but lenders consider many factors when determining what APR you’ll receive. Believe it or not, having excellent credit can hurt your chances of getting a good APR. Your best bet is always to shop around for financing and compare auto loan offers from different lenders.
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The Basics of Capitalized Costs
Most auto loans are amortized over a certain period. This means that rather than paying off your loan in one lump sum as soon as you buy your car, you’ll be paying off that loan for a set amount of time (usually six or five years) with fixed monthly payments. These payments typically include interest and principal.
Ensuring you get as low an interest rate as possible is important for keeping your monthly payments low. The best way to do that is by negotiating with your bank, but it’s also a good idea to shop around if you have time.