Typically, you begin shopping for car loans once you know your credit score. Next, you can compare different loan offers, including the fine print. Make these four factors part of your information gathering before signing on the dotted line.
1. What is the Annual Percentage Rate?
The annual percentage rate, commonly referred to as the APR, is crucial while you look at different options for a loan. The APR represents how much you will pay in interest during the term of your loan. Separate from the amount of your new car, this percentage can equal several hundred or several thousands of dollars.
A relatively low APR can save you a lot of money and give you a lower monthly payment. On the other hand, a high APR equals more interest you will pay. Additionally, your monthly payment will most likely be high.
2. What is a Comfortable Loan Amount?
The total amount of money you can borrow for a new or used car purchase is the loan amount. Being comfortable with the cost of buying a new or used vehicle is essential to making a good financial decision.
This may also include taxes, fees and how much you still owe for a trade-in, if you have a vehicle to trade. Generally, you can expect a high monthly payment if you borrow a lot of money. One way to reduce the amount of your loan is to have a large down payment at the time of purchase.
3. How Long is the Loan Term?
On average, the loan term for a new car purchase is five years. The longer your loan term, the lower your monthly payments. However, this also means you will pay more interest over the life of the loan.
With a short-term of three years, for example, you can pay off the loan faster and save on interest payments. However, this also means you will have a higher monthly payment.
4. How Much Can You Afford to Pay Each Month?
Basing your decision on the monthly payment can help you decide the best APR and loan term. Most online resources have car loan calculators to help you understand how much you can afford.
Borrowing tens of thousands of dollars can feel unnerving for some people. The good thing is you do not have to make this type of financial commitment blindly. Arm yourself with facts and figures so you do not spend more than you plan or can afford.