Most of us start car shopping with an unclear understanding of what, precisely, a car loan is. The truth is that a car loan is a product, just like anything else you put your hard-earned money down. And like anything else you’re paying for, you should take a moment and make sure that the price you’re paying is worth it.
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It’s Not Just The Price Of The Car
Car loans come in three big pieces. Those are the principal, which is the overall amount you’re borrowing; the interest, which is the percentage you pay above the principal for the privilege of being lent that money; and the term, which is how long you’ll be making payments on the principal … and how long you’ll be charged interest.
Believe it or not, there are ways to drive up the cost of all three of these in a car loan. Take, for example, the principal. You often won’t just be borrowing the negotiated cost of the car, but also any fees that are required on the state and federal level such as taxes, and you may be paying other fees depending on your situation. Remember, few fees are actually mandatory, so if you see a fee, ask why it’s in place and why it’s necessary. If you’re not convinced by the answer, ask the dealership to remove it from the bill.
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The Long-Term Cost
Next, work out exactly how much you’ll be paying in interest. This is somewhat complicated, in the sense that it involves the three parts of your loan working in concert. Essentially, the less you borrow for your principal, the lower your interest rate, and the shorter the term, the less you’ll be paying above the cost of your car loan.
It’s true that your interest rate is dependent on your credit score, and it’s not uncommon for many to believe that a bad credit score means they have to accept extremely high interest rates. This couldn’t be any further from the truth, however. Comparison shopping will let you find lenders that offer a wide variety of rates and terms and allow you to pick one that better suits your budget.
What Are You Paying For?
Finally, and most importantly, remember that at the end of this car loan you’re buying, you’ll be coming out of it with a car that you own. That might be a good thing or it may be a bad thing, depending on the type of car you need. Models hold their value for different reasons and in different ways: For example, in recent years as gas prices have risen, models with better fuel economy and lighter weight have seen their value rise sharply on the overall used car market. Conversely, ask a Hummer owner what it’s like trying to sell one of those used. Look at the historical data for your make and model and see how much your car will be worth when you’ve got the loan paid off.
In the end, it really comes down to you, the shopper. Choose your car carefully, and your car loan even more carefully, and you’ll find that at the end of it, you made the right fiscal choice.
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