Most people will need to take out a loan to buy a car from a dealership. This is simply because buying a car all-out is expensive and most people cannot afford the high pricetag. However, not all auto loans are created equal. There are several factors that will determine how much you will need to take out in loans and what the interest rate will be.
Downpayment
With almost anything that involves taking out a loan, the biggest down payment that you are able to make– the better. This will lower the loan amount that you will need to take out. Generally speaking, the lower the initial loan amount, the less time it will take to pay off. The less time it takes to pay off, the less you will likely pay in interest. To get a rough estimate of your loan payments, use an online loan calculator.
Interest Rate
How high auto loan rates are will be determined by the bank or credit union you are using to take out the loan. The lending institution will base your interest rate amount on a few things, including the price of the car, the down payment, whether or not you have collateral, how old the car is, and what your credit history/credit score is like.
Your bank may have set interest rates or it may change the interest rate depending on the person taking out the loan and the details of the car. If you are unsure what the interest will be, make sure to ask your bank ahead of time. Remember, the lower the interest rate, the better.
Loan Repayment Timeline
Your monthly payment, once the total amount of the loan has been figured out, will be determined by the down payment and the amount of time that you will take to pay off the loan. To figure out the monthly rate, the bank will first subtract the down payment amount from the original selling price of the car. Then, they will divide the remaining amount by the number of months it will take to pay off the loan.
The faster you pay off the loan, the higher the monthly payments will be. Luckily, this also usually correlates with a lower interest rate. The longer it takes you to pay off the loan, the lower the monthly payments will be. However, the interest rates may be higher. With all of this, you need to pick and choose. You will end up paying less in total if you pay off the loan faster, but some people simply cannot afford to do this. Choose whichever amount fits your budget best.
Car Age/Mileage
Some banks and credit unions may also take the age of the car or the number of miles that are on the car into account when choosing the interest rate amount. With all of these, the faster you pay off the car, the lower the interest amount is likely to be. However, the main difference comes in the range of low to high interest rates.
For example, the older the car is, the lower the difference between a “high” and “low” interest rate will be. The newer the car, the higher this difference will be. There are a few reasons why this happens, but it mainly comes down to liability. Older cars are worth less than new cars most of the time. It’s as simple as that. Banks use this fact to help determine the interest rate.
There are a lot of factors that go into how much your car payments will be when you take out an auto loan. The items included in this list are some of the most common variables that will affect the car’s interest rate, monthly payment, and total amount paid. When in doubt, pay as much up front as you can and pay off the car as soon as you can to end up paying the lowest amount possible.
