How to Compare Car Loan Rates
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- Part 1 of 1: Comparing car loan rates
While it might seem like an unwanted inconvenience at the time, determining the best car loan rate when you are purchasing your vehicle is an important decision. You’ll be expected to pay the loan at the rate agreed upon, so don’t get so caught up in the excitement of the new car that your forget to compare car loan rates and get the best deal for you. In this article, Step 1 recommends getting a handle on car loan terminology, Step 2 suggests considering a range of loans, Step 3 advises evaluating the terms carefully, Step 4 tells you how to calculate the overall cost, and Step 5 encourages you to consider your budget and needs.
Part 1 of 1: Comparing car loan rates
Step 1: Understand all the loan terminology. If you’ve never had a loan before or if you are not completely familiar with all the terms, get acquainted before you start the process.
You’ll be much better off if you know what the APR and principal are, how interest is calculated, and what the options are for length of loans. This will better prepare you as you are going through the process to know how favorable the loan offers you receive really are.
Step 2: Consider a variety of loan options. There are a number of ways to get loans for a car, and these may be more or less suited to your situation.
One way of getting a car loan is through the dealership itself. While these types of loans are often better for those with lower credit, you may end up paying more in interest over the long term.
Another option is a bank. The loan rates are generally better than car dealerships but this may not be available to your unless your credit is strong.
A final option is a credit union. These are often only available to those who meet a set of special membership criteria, such as a certain line of work or living in a specific area. If you are already a member or think you may become one, this is a good option with generally lower rates.
Step 3: Closely evaluate the terms of each loan option you receive. For every loan application you put in, thoroughly investigate its details and payment expectations.
Check the total loan amount to be sure it is what you were expecting, and figure out what the term of the loan is. Most of all, you’ll want to be on the lookout for the APR, which is the annual percentage rate, appearing in the form of a percentage.
Together, these numbers make up the details of your various loans.
Step 4: Calculate the overall costs of each loan. With each option in front of you, you can compute how each loan will affect you financially over the long term.
A good way to do this is by using an online tool, such as Bankrate’s online auto loan calculator.
For example, let’s say you have two options in front of you with the same total loan amount and the same APR: $20,000 at 4.5%. But the two loans have different terms. The first has a term of 36 months while the second has a term of 60 months.
The 36-month loan would have a monthly payment of $594 while the 60-month loan would have a monthly payment of $372. For a savings of about $120 per month, the decision sounds simple, right?
Well, the fact is that you’ll pay more total over the life of 60-month loan even though you have a lower monthly amount owed. In total, on the 60-month loan, you would pay roughly $22,371. In total, on the 36-month loan, you would pay roughly $21,417.
What this shows is that you save over $1000 overall by electing a shorter loan. The interest really does add up.
Step 5: Consider your financial needs. As we have seen, different loan options will have different payment schedules and total amounts paid, so decide which fits your situation best.
Maybe you’d gladly pay more over the life of a loan to make it more affordable each month. This sort of decision will be grounded in your unique financial situation.