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What You Need to Know about Car Loans

One of the most common reasons borrowers become dissatisfied with their car loans is because they did not understand the loan in the first place. Here is a list of the questions you need to ask your lender to find out everything you should know about your auto loan.

  1. What is the APR on the car loan? The only way to find out the true interest rate you're paying on car loans is to evaluate the APR (annual percentage rate). The APR is much more than a reflection of a loan's interest rate; it is a numerical representation of the total cost of borrowing. All fees and charges are included in this number in addition to interest expense. How competitive your APR is will be determined by your credit score.
  2. Exactly how much am I paying for the car? Don't confuse the price of the vehicle with the amount of the loan; they are two different numbers. The price of the vehicle is how much the vehicle costs, whereas the total amount of the loan is how much the vehicle will cost to finance. Ask your lender or dealership exactly how much you're paying for the vehicle so this figure isn't lost in the financing package. Dealerships have a way of hiding inflated vehicle prices in financing deals, so this question is particularly important if you choose a dealership car loan.
  3. Does the loan contain any potential penalties or hidden charges? Car loans usually have some form of possible penalties associated with them. For instance, many auto loans have an early-payment penalty for borrowers who pay the loan off earlier than agreed. Similarly, your car loan may have penalties in the form of hidden charges that could easily slip by you.
  4. What is the dollar amount that I am financing? The total amount you're financing is the price of the vehicle (less any down payment) plus the interest charges of your car loan over time. When you see the total amount you're financing, you can more accurately judge exactly how much you're paying for the convenience of borrowing.
  5. How much is the monthly payment? The monthly payments of car loans are the interest and principal you must pay every month to your lender. Your lender should be able to tell you the exact dollar amount of your monthly payment and when it is due. Verify that the monthly payment will fit comfortably in your budget before you go through with the loan.
  6. How many payments do I have to make? The number of payments you must make will depend on the term of your loan. Normally, car loans come with terms of 36, 48, or 60 months. Loans with shorter terms than these tend to have unreasonably high monthly payments, while loans with longer terms have unnecessarily high interest expenses.