How Interest Rates Work on Auto Loans

Getting a longer-term car loan with lower interest rates can keep your monthly bill under budget, but is it good for you?

To answer that question, you need to understand how auto loan interest rates work.

Top Three Factors for Auto Loans

The average price of a new car is $ 33,652 since June 2016, a 2% increase from June 2015, so it is not surprising that consumers are increasingly financing their purchases with long-term loans. The average term of a car loan is 68 months. First quarter of 2016.

But these are the big three factors to consider before getting your own car loan:

  • Interest rates on auto loans change daily and vary widely. Before entering a showroom, check current auto loan rates. You might consider getting pre-approval from a bank or credit union before buying a car. Consumer advocates say a car dealership could offer you a good price on the car or a good chunk of financing, but not both. In either case, you want to know what a “good deal” loan is right now.
  • Auto loans include simple interest costs, not compound interest. This is good. The borrower agrees to repay the money, plus a fair percentage of the amount borrowed. (In compound interest, the interest earns interest over time, hence the total amount paid for the snowballs.)
  • Auto loans are “written off.” As with a mortgage, interest owed is charged up front on advance payments. During the drop in house prices, homeowners who had more than their homes to resell were said to be “under water.” Similarly, car buyers can drive “under water” for a long time, unless they’ve had a high down payment or switched to the latest model because a car’s value depreciates sharply as soon as you take it out of the box. lot.
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Pushing the numbers

The following examples show how the car loan you choose determines the true cost of a car. In each case, the car, the prepayment and the amount to be financed are the same: the average price is $ 33,652. The advance is 10%. The amount to be financed is $ 30,287.

  • A 4% loan for a period of five years would cost $ 557.78 per month. At the end of that time, you would have paid $ 33,466.80 in monthly payments. Enter the down payment of $ 3,365.20 and the actual cost of the car is $ 36,832.
  • If you extended that loan to eight years, the monthly payment would drop to $ 369.18. At the end of that time, your loan payments would total $ 35,441.28. Including the upfront payment of $ 3,365.20, the actual cost of the car rises to $ 38,806.48.

Your monthly payment and the total

The interest rate you get on the loan has a big impact on these numbers. Think about how the numbers change if you were to pay a 6% rate instead of 4% for the same car.

  • The monthly payment for a five-year loan is $ 585.53 to $ 30,287 at 6% interest. I would pay $ 35,131.80 in monthly payments. Add in the 10% down payment and the car costs $ 38,497.
  • If it is extended over an 8-year term, the monthly payment on that $ 30,204 loan drops at 6% interest to $ 398.01 per month. Loan payments would total $ 38,208.96. Enter the 10% down payment and the car costs $ 41,574.16.

You can run the numbers yourself using loan calculator.

The baseline

Choosing a car loan is always a tradeoff. If you’re on a tight budget, a lower monthly bill is an attractive option, but it means more monthly payments and a higher actual price for the car. If you want to pay the best price for the car and a faster way to get out of debt, you will have to manage a large monthly payment.

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