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Things that Affect Your Auto Loan Cost

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Let’s say you and your friend bought the same car. But you noticed that he’s paying less for it. How could that be possible? There are several factors that affect how much an auto loan would cost you. In this guide, we’ll take a look at three.

 

APR

The APR or annual percentage rate is the total cost of the loan expressed as a yearly rate. By law, every lender has to disclose the APR of each of their loan product. The higher the APR, the more costly the loan is. So when comparing auto loan quotes, the one with the lowest APR is most likely the least costly. In the example below, the APR we used is something you are more likely to get—if you have good credit—from banks here in Denver.

 

Auto Loan A

Loan Amount: $20,000

Down Payment (10%): $2,000

APR: 4.5%

Term: 48 months

Monthly Payment: $410.36

Total Interest: $1,702.21

Total Amount Paid Over 48 Months: $19,701.21

 

Auto Loan B

Loan Amount: $20,000

Down Payment (10%): $2,000

APR: 6%

Term: 48 months

Monthly Payment: $422.73

Total Interest: $2,291.07

Total Amount Paid Over 48 Months: $20,291.07

 

DOWN PAYMENT

The down payment is the required amount you need to hand the dealer upon purchase. An ideal down payment is 20% of the purchase price. But these days, people only make an average of 10%. In any case, not putting any money down will make your auto loan the costliest—just like Auto Loan B in this example:

 

Auto Loan A

Loan Amount: $20,000

Down Payment: $2,000

APR: 4.5%

Term: 48 months

Monthly Payment: $410.36

Total Interest: $1,702.21

Total Amount Paid Over 48 Months: $19,701.21

 

Auto Loan B

Loan Amount: $20,000

Down Payment: $0

APR: 4.5%

Term: 48 months

Monthly Payment: $456.07

Total Interest: $1,891.35

Total Amount Paid Over 48 Months: $21,891.35

 

LOAN TERM

The loan term or how long you will repay the loan affects the overall cost of your auto loan. The longer the term, the more costly your loan could get. We suggest keeping the loan term short. However, many car buyers still opt for long terms because of the lower monthly payments they can get—but they would realize the true cost only when it’s too late. To explain this further, we made some computation below. But look at Auto Loan B more closely. Keep in mind that longer terms come with higher interest rates.

 

Auto Loan A

Loan Amount: $20,000

Down Payment: $2,000

APR: 4.5%

Term: 48 months

Monthly Payment: $410.36

Total Interest: $1,702.21

Total Amount Paid Over 48 Months: $19,701.21

 

Auto Loan B

Loan Amount: $20,000

Down Payment: $2,000

APR: 5%

Term: 72 months

Monthly Payment: $289.89

Total Interest: $2,871.99

Total Amount Paid Over 48 Months: $20,871.99

 

THE BOTTOM LINE

The APR, down payment and loan term are just a few factors that affect your auto loan cost. There are other things like sales tax, hidden fees and car price that affect your auto loan the same way. Before taking an offer, make sure you do some math yourself so you will have a rough estimate of how much an auto loan would cost you more or less. This practice helps you set a more viable and more efficient budget and avoid costly auto loans.

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