The role of car loan interest rates

Getting a longer-term car loan at a lower interest rate may make the monthly bill lower than the budgeted level, but is it good for you?
To answer this question, you need to understand how the interest rate on a car loan works.

Three factors of car loan

As of June 2016, the average price of new cars was $33,652, a 2% increase from June 2015, so it is not surprising that consumers are increasingly using long-term loans to fund purchases. As of the first quarter of 2016, the average car loan period was a record 68 months.
But before you apply for your own car loan, there are three major factors to consider:

Car loan rates are changing every day and are changing a lot. Please check the current price before entering the exhibition hall. You can consider getting a pre-approval from a bank or credit union before buying a car. Consumer advocates say car dealers may give you a good price, or a good financing, but not both. In any case, you want to know what the "good deal" of the current loan is. (See 6 ways to reduce the cost of car loans.)

Car loans include simple interest costs, not compound interest. This is good. The borrower agrees to pay back the money plus a fixed percentage of the amount of the loan. (In compound interest, interest accrues over time, so the total amount paid is snowball.)

Car loans are “amortized”. In a mortgage, the interest owed is paid in advance. During the plunge in housing prices, homeowners who owe more than the value of their homes are called “underwater” homeowners. Similarly, people who buy a car can also "underwater" for a long time, unless they have a large down payment or a late model because a car is once you drive it off the parking lot, it There will be value.

Calculated number

The following example shows how the actual cost of a car is determined by the car loan of your choice. In any case, the amount of car, down payment and financing is the same: the average price is $33,652. 10% down payment. The financing amount is $30,287. A five-year, 4% loan costs $557.78 a month. Until then, you will pay $33,466.80 a month. With a down payment of $3,365.20, the actual cost of the car will be $36,832. If you extend the loan to eight years, the monthly supply will fall to $369.18. By then, your total loan will reach $34,541.28. Including a down payment of $3,365.20, the actual cost of the car rose to $38,806.48.

Your monthly payment - and total

The loan interest rate has a huge impact on these figures. Consider how these numbers will change if you pay 6% instead of 4% for the same car. The five-year loan is $30,287, and the monthly interest rate of 6% interest is $585.53. You pay $35,131.80 a month. With a 10% down payment, the car costs $38,497.

If the loan period is extended to 8 years, then the loan interest of $30,204 per month is 6%, which will be reduced to $398.01 per month. The total loan amount is $38,208.96. With a 10% down payment, the price of this car is $41,574.16.