Auto Loans
using auto loans to financing vehicle purchase
Use a bank or dealer auto loan to finance your vehicle purchase with repayment terms that fits your budget — these loans are secured by the auto value and offer some attractive rates and terms.
Below are four (4) quick summary features of auto loans:
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about auto loans
What is a Auto Loan
An Auto Loan is a fixed, rate amortization loan. The components includes:
- Principal Amount:
amount need to purchase the account
- Interest Rate:
the rate lenders will charge for the loan
- Term:
the length of time you have to repay the term
Lenders will use an amortization schedule to calculate your monthly payments
Let's say that you want to purchase a new car. The total cost is $20,000. The auto dealer offers a financing plan for 60 months at 6.75% APR with a low, monthly payment at: $393.67
The total amount of interest and principal paid over the 60-month term at 6.75%:
- Total Payments $23,620
- Total Interest Paid $3,620
- Total Principal Paid $20,000
about auto loans
How Amortization Works
An amortization schedule (illustrated below) is calculated that shows that the borrower must pay $393.67 each month for 60 months in order to meet the interest obligation and to pay down the borrowed amount to $0 over 5 years.
The interest charges for the first month is calculated as such:
$20,000 X 6.75% (divided by) 12 months = $112.50
In the first payment, the borrower pays the lender $112.50 in interest. The remaining amount of $281.17 will repay the loan and reduce the borrowed amount to $19,718.83.
The interest charges for the second month is calculated as such:
$19,718.83 X 6.75% (divided by) 12 months = $110.92
In the second payment, the borrower pays the lender $110.92 in interest. The remaining amount of $282.75 will repay the loan balance and reduce the borrowed amount to $19,436.08
This will continue all the way through the 60th payment, where the borrower pays the lender $2.20 in interest. The remaining amount of $389.28 will repay the loan balance and reduce the borrowed amount to $0. The auto loan obligation has been paid off.
| Month | Starting Balance | Monthly Payment | Interest | Prin |
|---|---|---|---|---|
| 1 | $20,000.00 | $393.67 | $112.50 | $282.17 |
| 2 | 19,718.83 | 393.67 | 110.92 | 282.75 |
| 3 | 19,436.08 | 393.67 | 107.73 | 284.34 |
| 4 | 19,151.74 | 393.67 | 106.12 | 285.94 |
| 57 | 1,552.78 | 393.67 | 8.73 | 382.78 |
| 58 | 1,167.84 | 393.67 | 6.57 | 384.93 |
| 59 | 780.74 | 393.67 | 4.39 | 387.10 |
| 60 | 391.47 | 393.67 | 2.20 | 389.28 |
| Total: | $23,620 | $3,620 | $20,000 | |
about auto loans
Dealer or Bank Financing
It makes no difference if you finance your car through a dealer or bank. You will likely get the same rate regardless where you choose to finance.
Rates are determined by two parameters:
Your Credit Rating:
the higher your credit rating, the better your overall rate: see our credit management center for information about your credit scoreYour Debt-to-Income Ratio:
calculates the amount of debt that you have compared to the income you make.
Your total debt-to-income ratio should be lower than 36% in order to qualify for the best interest rate. In other words, the total amount of your debt payments (including our mortgage or rent) should not be more than 36% of your total income: calculate your debt-to-income ratio
about auto loans
How the Dealer is Paid
Understand that the dealer is paid by the lender when they refer an auto loan application. Dealers will provide financing on behalf of the lenders.
When you sit down with dealer financing, they will submit your application to their preferred lenders who in return will send back a repayment term and interest rate.
Understand that the higher the interest rate that the dealer can get, the higher the award that the lender will pay the dealer.
So the dealer will often try to get the rate up in order to maximize their lender fee.
about auto loans
Dealer Try to Sell Payment
Dealers will often sell you the monthly loan payment instead of the interest rate. Most consumers do not understand rate. They do however understand how much they can afford each month.
So when you sit down with dealer financing, the first question they will ask you is how much you can afford. The dealers will then take your affordability amount, and based on the purchase price of the car, they will present you will 1-2 repayment plans.
The dealers are required by law to give you the interest rate (the APR). But they hope to sell you on the attractive repayment plan instead of a lower interest rate.
And the higher interest rate that the dealer can get, the higher the award is paid to the dealer.
about auto loans
Shop Around
You need to shop interest rates to get the best overall deal. Note that by shopping around and doing your homework, you can get a better interest rate and loan payment.
These are the steps to follow:
- start with a high credit score:
if your credit score is 720 or above, you can negotiate best interest rate and repayment term.
If you score is less than 720, you rate may need to be a little higher: see our credit management center for information about credit scores
- download this amortization sheet:
use this amortization sheet to run repayment scenarios. Try different rates, repayment amounts, etc., to come up with the best financing option.
- start your application:
with your local bank or credit union. If you have a good credit and debt rating, you can find an auto loan with attractive rates and repayment terms. - start the negotiations:
take the quotes that have been given you from your application and ask the dealer to get you a better deal. If they can't, you know that you have best deal.
Helpful Tools
Some helpful tools for making decisions:
