When you’re shopping for a car loan, remember that what it costs you to borrow depends on three things:
- The finance charge expressed as an annual percentage rate (APR)
- The term, or length of time the loan lasts
- The principal, or the amount you borrow
The APR (Annual Percentage Rate) is a percentage of the loan principal that you must pay to your credit union, bank, or other lenders every year to finance the purchase of your car. This finance charge includes interest and any fees for arranging the loan. The charge gets added to the amount you borrow, and you repay the combined total, typically in monthly installments over the course of the term.
Here’s an example: if you took out a $15,000 four-year auto loan with a 7.5% APR, the minimum monthly payment would be about $363. If you only made minimum payments throughout the life of the loan, you would pay $2,408 in interest, meaning that you’ll be on the hook for $17,408 total (principal + interest).
When you’re looking for a loan, you want the lowest APR you can find for the term you choose. The higher the rate, the more borrowing will cost you.