How to Read the Loan Terms
The loan terms include the interest rate, the loan term, the monthly payment, the total interest paid, and the total cost of the loan. The annual percentage rate, or APR, is the most important number, since it includes the interest rate plus any fees charged by the lender. The loan term is the length of the loan in months, and the monthly payment is the amount due each month. The total interest paid is the difference between the amount financed and the total of all the monthly payments. The total cost of the loan is the amount financed plus the total interest paid. A 25,000 dollar used car loan at 8 percent for 60 months has a monthly payment of 507 dollars, total interest of 5,420 dollars, and a total cost of 30,420 dollars.
What Affects the Final Rate
Several variables can push the rate above or below the national average. The loan to value ratio, which is the loan amount divided by the vehicle value, is a key factor. Lenders prefer a loan to value ratio under 90 percent, so a larger down payment results in a lower rate. The vehicle age and mileage are also important, with newer vehicles and lower mileage getting the best rates. The loan term affects the rate, with shorter terms getting the best rates. The debt to income ratio is another factor, with lenders preferring a ratio under 36 percent. The borrower's employment history, with at least 2 years at the same employer or in the same field, helps the rate.
How to Get the Best Deal
Improve the credit score before applying, since a 50 to 100 point improvement can save 1,000 to 3,000 dollars in interest. Put down at least 10 to 20 percent of the purchase price. Choose a 36 to 60 month loan term. Apply with a co signer who has strong credit if needed. Shop multiple lenders within a 14 day window so the credit inquiries count as a single hit on the credit score. Use a credit union if eligible. Purchase a certified pre owned vehicle from a franchised dealer to get the manufacturer backed warranty. Set up automatic payments to get a rate discount if offered. Negotiate the rate with the dealer by bringing a pre approval from a bank or credit union. Read the loan contract carefully before signing.
Common Mistakes to Avoid
The most common mistake is focusing on the monthly payment instead of the total cost of the loan, which can lead to a longer term and more interest. A second mistake is skipping the pre approval and using dealer financing without a comparison, which can result in a 1 to 2 percent markup. A third mistake is adding extras such as extended warranties, GAP insurance, and service plans to the loan, which increases the balance and the interest. A fourth mistake is choosing a loan term longer than 60 months, which can result in being underwater on the loan. A fifth mistake is not shopping multiple lenders, which can result in a 0.5 to 2 percent higher rate. A sixth mistake is lying on the loan application, which is fraud and can result in the loan being called.
Photo: Wikideas1, CC BY, via Wikimedia Commons (https://upload.wikimedia.org/wikipedia/commons/e/ec/Average_New_Car_Interest_Rates.webp?utm_source=commons.wikimedia.org&utm_campaign=imageinfo&utm_content=original)
Fazlur Rahman
