A lower monthly payment on your car loan doesn’t always mean you’re saving money. Here’s how car loans work.
Purchasing a car typically means taking out a car loan. If you’re in the market for a new vehicle, you’ve probably spent a lot of time researching car options, but do you have a good understanding of how car loans work? When you take out a car loan from a financial institution, you receive your money in a lump sum, then pay it back (plus interest) over time. How much you borrow, how much time you take to pay it back and your interest rate all affect the size of your monthly payment. Here are the 3 major factors that affect both your monthly payment and the total amount you’ll pay on your loan:
- The loan amount. It can be significantly less than the value of the car, depending on whether you have a trade-in vehicle and/or making a down payment.
- The annual percentage rate. Usually referred to as the APR, this is the effective interest rate you pay on your loan.
- The loan term. This is the amount of time you have to pay back the loan, typically 36–72 months.