You can save a lot by shopping around for the best auto loan. But trying to compare loans can be confusing. Different lenders offer different kinds of loans and loan features, use different terminology and charge different fees. And the lowest monthly payment doesn’t necessarily indicate the best or the least expensive loan.
But there is an easy way to make apples-to-apples comparisons. Focus on a few key attributes and see how the loans stack up against each other on those points. You’ll soon find the loan with the most favorable combination of rates and features.
Here are some of the measures you should take into account:
- The total up-front fees and charges. It really doesn’t matter whether the lender calls them loan origination fees or processing fees. What matters is the total cost to you, the borrower. And that’s easy to compare – just itemize and add up the fees and charges for each loan.
- The annual percentage rate (APR). This number includes the interest rate on the loan plus all lender fees and charges, and represents the true annual cost of the loan to the borrower, expressed as a percentage of the principal of the loan. The lower the APR, the better. The federal Truth in Lending Act requires all lenders to calculate APR the same way and to disclose it in bold print on every consumer loan agreement. It’s a much more revealing way of comparing two loans than the interest rate alone. Comparing APRs may show that a low-interest loan with high fees and service charges actually is more expensive than a loan with a higher interest rate and low or no additional fees and charges.
- The total cost of the loan, or the sum of all the monthly payments you will make plus all fees and charges. This is a better way to compare the cost of two loans than monthly payments, because it captures fees and charges plus total interest charges over time. A $10,000 loan at 6.5 percent interest amortized over 60 months will carry a lower monthly payment than the same loan at the same rate amortized over 36 months. But the total cost of the 60-month loan will be greater, because you will pay much more interest. If possible, avoid longer-term auto loans. Because a car depreciates very quickly in the first year or two you own it, from there on in you may owe more on your loan than the car would fetch at resale.
- Prepayment privileges. If you are able to pay down your car loan faster than anticipated with extra monthly payments, you can save plenty in interest. Compare any prepayment privileges attached to different loans to see how many extra payments you’re allowed per year – the more the better. If a loan doesn’t have a prepayment privilege, see if you can negotiate one.
- Early-discharge penalties. Check out the interest penalties different loans impose if you pay off the entire loan early. Many lenders require you to pay the total interest charges remaining until the loan’s original maturity date. Others may charge a set penalty, such as three months’ worth of interest. The best loan is the one with the lowest penalty.