Finance

Sep 6 2017

What are the ins and outs of car loans? #loans #for #cars


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There are plenty of decent used cars on the market in the $5,000-$8,000 price range, which you may be able to pay for up front. But if you don’t have access to that kind of cash or want something more expensive, you may need to obtain a car loan. You can get these loans from car dealers, banks, and credit unions.

This section outlines the considerations you should be aware of when you’re thinking about taking out a car loan .

1. Calculating the monthly payment you can afford

Car loans are generally paid off in monthly installments. With your budget and finances in order, you’ll be able to calculate how much you can afford to put towards a car payment. But don’t forget that loan payments are not the only cost of owning a car.

Use a tool such as Edmunds True Cost to Own Calculator to estimate other costs, including annual taxes and fees, fuel, insurance, maintenance, and repairs. Plug in the year, the make and model, and your ZIP code to find the true cost of owning many popular car models. This “true cost” estimate includes depreciation, which is a loss you should be aware of, but not an outlay that you need to include in your budget. Additionally, the “true cost” estimate includes financing charges, but not principal loan payments, which do need to be included in your budget.

2. Comparing car loans

APR: This is the “annual percentage rate” of interest you’ll pay on the money you borrow. It is the most important factor in comparing loan terms.

Sometimes zero-interest isn’t the best deal. Paying interest with a rebate might be better. Do the math instead of taking the offer that looks best at a glance.

Down Payment: The more you put down toward a car’s total purchase price, the less you need to borrow. If you have tarnished credit, a larger down payment may earn you a lower APR due to the decreased risk for the lender.

Additional Finance Charges: Lenders may charge additional fees for originating a loan. Be clear on whether these are rolled into the APR or need to be considered separately.

Loan Term: The length, or “term,” of a car loan can stretch to 72 or 84 months.

Six- and seven-year car loans are not recommended. Interest rates will be higher. Plus, such extended loans with lower monthly payments may cause you to purchase a car that you can’t really afford; what if your car loses all value and needs replacement with two years left on the loan?

36- to 60-month loans are recommended.

Prepayment Penalty: Lenders may charge a fee for paying off your loan early. This compensates the lender for their administrative costs in the event they don’t earn all the interest they anticipated. Many lenders, however, do not penalize early payment, so do your research.

Miscellaneous Fees: Avoid offers that charge you a ton of random fees. You can find offers without these fees.

3. Credit scores and loans

Your Credit score will determine what interest rate you qualify for:

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