According to the most recent State of the Automotive Finance Market study from Experian, the average new car loan worked out to $30,032, lasted 68 full months, and came with a monthly payment of $503 during the first quarter of 2016. Meanwhile, the average used car loan came with a price tag of $20,723, a length of 66 months, and a monthly payment of $376. No matter how you cut it, these loans represent huge financial investments on the part of the buyer.
With so much money being spent on new and used vehicles, it's more important than ever to shop around for the right loan. Of course, that's after you check your credit score to make sure you'll qualify for the best deal.
Once you know how your credit score looks, it's crucial to compare loan offers and read all of the fine print. Here are five factors to consider as you compare car loans for the best deal:
Annual Percentage Rate (APR)
When shopping for a car loan, your annual percentage rate or APR is a crucial consideration. This percentage represents the amount of interest you'll pay on your loan during its term, and could mean a difference of hundreds or even thousands of dollars. With a higher APR, you'll pay more interest and have a larger monthly payment. With a relatively low APR, on the other hand, you'll save money on interest and pay a smaller payment each month.
Since some dealerships offer special financing deals (and even 0% APR) at times, you should check with them first. In addition, you can compare loan rates with traditional banks, online banks, and credit unions.
When you take out a car loan, your monthly payment is the amount of money you need to pay every month. Several factors determine your monthly payment, including your APR, your loan amount, and the term of your loan. If you're curious how much a specific car might cost you on a monthly basis, playing around with our loan calculator can help.
Your loan term represents the length of your loan. As mentioned above, the average loan term for a new car was 68 months – or more than 5 ½ years – in early 2016. While a longer loan term can help you secure a lower monthly payment, you'll end up paying more interest over time. A short loan term can help you pay down your loan faster, on the other hand, but your monthly payment will generally be a lot higher.
Your loan amount is the total amount of money you borrow for your new or used car. This amount can include the purchase price of your vehicle, any applicable taxes and fees, and even amounts you still owe on a trade-in vehicle. The more money you borrow, the higher your monthly payment will be. However, you can always reduce your loan amount by saving up a large down payment.
Penalties and Fees
Before you select a car loan, it's crucial to find out whether any penalties or fees are involved. For example, some car loans exact a prepayment penalty if you pay your car off before the term of your loan ends. If you choose a loan with this stipulation, you'll need to pay this fee if you choose to pay your car off faster than loan terms dictate.
A processing fee is a common fee banks and lenders charge in order to process and fulfill your loan application. While some lenders charge a flat fee, others charge a percentage of your loan instead. Since these fees can vary tremendously, it's important to know what they are and question whether they are fair.
To find out whether other fees or penalties exist in your new loan's terms, ask all the questions you can and read the fine print.
Borrowing $30,000 or more for a new car isn't for the faint of heart, but that's exactly why you should arm yourself with information first. Once you have a handle on the details that go into each car loan, you can shop around and compare loans for the best deal. But without this information, you could wind up spending a lot more than you planned.