What is the actual cost of a standard car loan?

Most new car buyers finance a vehicle's purchase with a loan from a bank, a credit union or a program offered by the dealership. But what will those monthly payments really include?
Most new car buyers finance a vehicle's purchase with a loan from a bank, a credit union or a program offered by the dealership. But what will those monthly payments really include?
Comstock Images/Comstock/Thinkstock

When was the last time you handed over a stack of cash or a personal check for the entire cost of a new or used car? It's likely that you've ever done it, or even know anyone who's done such a thing. Most car shoppers finance vehicle purchases with a loan from a bank or a credit union or through a program offered by the dealership. Either way, it involves monthly payments. But what will those payments actually cost you?

There are two main parts of a loan: the principal and the interest. Principal is the purchase price minus any down-payment money. It's the actual amount of money you're borrowing. So if you buy a car for $25,000 and put down $5,000 in cash the day you buy the car, the principal amount of your loan is $20,000.

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The lender adds interest to the loan to earn a little money for his or her trouble. The lender is taking the risk that you're good for that $20,000. In return, the lender gets an additional percentage of the total amount that you borrow. The APR, or annual percentage rate, that gets tacked onto the car loan usually depends on your credit history, current rates and the length of your loan.

If you're buying a new car at a dealership, the salesperson will likely offer a slate of add-ons that would roll into your monthly payment, making it significantly higher. These include things like an extended warranty, GAP insurance, life and disability insurance, theft protection or a service contract. Know before you go into the dealership if any of these offerings might be beneficial for your particular situation. You may find that these add-ons make the cost of your new car a little (or a lot) more money than you initially wanted to pay each month.

So let's say you keep it simple and get a straightforward car loan. What kind of APR can you expect?

Average APR for a Car Loan

The better your credit and the shorter the length of the loan, the better the annual percentage rate.
The better your credit and the shorter the length of the loan, the better the annual percentage rate.
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The annual percentage rate for a car loan can vary greatly. The APR you'll receive is mostly determined by these factors:

  • What's your credit history and credit score like?
  • Are you buying a new or used vehicle?
  • How long will you take to pay off this loan?

The better your credit and the shorter the length of the loan, the better the rate. And loans for new cars get better interest rates than used car loans. Geographic location may come into play as well. Some areas have higher interest rates than others.

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Your credit history is compiled by reporting agencies using information from your creditors, including mortgages and credit cards. The agencies use a formula to rate your credit history on a scale of 300 to 850, known as a FICO score. A higher number usually results in a lower car loan interest rate. Advertised interest rates are usually for borrowers with credit scores in the good to great range -- FICO scores above 700, for example.

That doesn't mean those with less than perfect credit can't get a loan; it just means you'll have a higher APR. These days, buyers with the best credit scores can find auto financing at around 6 percent; those with the worst scores may pay around 18 percent [source: Edmunds.com].

If you are able to make a slightly higher monthly payment, the rates for a 48-month loan is usually about a half a percentage point lower than those for a 60-month loan. It may not sound like much, but a half a point can add up over the course of five years. And remember: Interest is only paying for the lender's trouble. The principal is what's paying for your new car.

Just as you would shop around for the vehicle that best fits your lifestyle, you should also shop around for the loan and interest rate that fits your bank account.

For more information about the cost of car ownership, follow the links on the next page.

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Sources

  • Bankrate.com. (July 14, 2010)http://www.bankrate.com/auto.aspx
  • Edmunds.com. "Auto Loan Calculator." (July 14, 2010)http://www.edmunds.com/apps/calc/CalculatorController
  • Helperin, Joan. "Low or No Money Down? You Need GAP Insurance." Edmunds.com. (July 23, 2010)http://www.edmunds.com/advice/finance/articles/105266/article.html
  • Helperin, Joan. "New Credit Scoring System Affects Auto Loans." Edmunds.com. (July 23, 2010)http://www.edmunds.com/advice/finance/articles/159646/article.html
  • Lending Tree. "Auto Loans and Interest Rates." (July 23, 2010)http://www.lendingtree.com/auto-loans/advice/auto-loan-basics/auto-loans-and-interest-rates/
  • Mello, Tara Baukus. "Car Loan Add-Ons: Are They Worth It?" Bankrate.com. (July 14, 2010)http://www.bankrate.com/finance/auto/car-loan-add-ons-are-they-worth-it.aspx
  • Tucker, Sean. "The 0% Financing Craze: A Good Deal?" US News and World Report Rankings and Reviews. (July 23, 2010)http://usnews.rankingsandreviews.com/cars-trucks/The-0-Percent-Financing-Craze/