Basic Auto Loan Considerations
By Craig Gocken
Between the heat and the extra miles spent driving on vacations or road trips, summer can be hard on your car. Maybe you’re starting to suspect that a new car purchase is in your not-to-distant future. Often car buyers will do extensive research on the car but fail to put much thought into how the car will be financed. You may have cash on hand or in savings to pay the full purchase price up-front, but if not, then you will need to secure an auto loan. Not all auto loans are the same, so before you enter into a loan agreement, you should try to find the best deal.
In order to evaluate your options, you need to consider not just the purchase price, but the total cost as well. During the process of shopping for a car, the purchase price gets all the attention. However, you may be surprised to know that the purchase price is not the same as the total price you will pay for the car. In addition to taxes, license, and fees (which usually add up to approximately 10% of the value of the vehicle), there are varying costs associated with financing the vehicle. Interest paid over the term of the loan contributes to the total cost you will pay.
Two factors that will influence the amount of interest paid are the interest rate on your loan and the length over which you are repaying your loan. Interest rates vary significantly from loan to loan. In general, borrowers with a better credit history will receive a lower interest rate. On the other hand, borrowers who have very poor credit may have a hard time getting a loan or may be forced to pay a much higher interest rate. Rates can also differ based on the lending institution. Don’t just assume that the rate the car dealership offers you is the best one you’ll qualify for. Shop around for your interest rate just like you did for your vehicle.
The length of your loan (how long you will take to pay it back) also has an effect on the total cost of your vehicle. Since interest accrues based on the amount still remaining to be paid back, the higher your loan balance and the longer that balance stays high, the more you will end up paying over the course of the loan. In an effort to reduce monthly payments, some buyers are choosing auto loans with terms as long as 7 years. With a loan of this length, not only will you be paying a significant amount in interest, but you may also find that you are upside down in your loan (that is, you owe more than the car in actually worth).
When you are in the market for a new car, you have a lot of your mind. You are probably checking out things like gas mileage, maintenance forecasts, and safety ratings on the cars you are considering. These are important, but don’t neglect to investigate the particulars of your auto loan as well. Get multiple quotes for your loan and compare. In short, do the math and find out how much your loan will cost you in total. Federated Bank provides auto loans that are competitive and flexible. If you are thinking about a car purchase, we can even tell you in advance the amount and rate you would qualify for. Talk to a loan officer today and we’ll help you find a loan that works for you.
