Auto Finance Terminology
Total Price This is the price upon which you and the dealer finally agree, minus any rebates. The dealer will calculate tax based on this amount.
Down Payment This is the chunk of up-front money that you put down to symbolize your intent to pay off the rest of the vehicle. The more money you pay up front, the less you'll pay every month to follow. A larger down payment may also score you a lower interest rate.
Interest Rate This is one of the most important numbers to look at when you're choosing a finance option. It's the rate a lender charges you for the benefit of borrowing its money. In the world of automobile financing, interest rates are generally referred to as APRs: Annual Percentage Rates. The APR is a rate of interest, calculated yearly, that includes all of the fees and expenses associated with acquiring a loan. It is always tied in with a loan term. It might be, for example, 1.8% for 36 months, or 2.8% for 48 months. A higher interest rate will increase your monthly payments. To see how much the interest rate affects the total amount you'll end up paying, play around with our loan calculator.
Term This is how long you will be paying the loan down. The longer the term, the smaller your monthly payments will be — but the more total interest you will pay.
Where do you get the money?
Financing can be arranged either through the dealer or through a separate lending agency. Who should you finance with? Whoever gives you the best deal, of course.
- Dealer financing The big advantage of dealer financing is convenience. You buy and finance the car all at once. In addition, dealerships do some of the legwork for you. They have all the numbers in front of them and save you the hassle of collecting different bank rates. But if the dealer is just reselling a bank loan to make a profit, the rates won't be the best. Occasionally, dealers offer special rates to get rid of overstock, especially at the end of a model year. So make sure you ask them about financing and compare their offer to your prearranged financing.
- Banks You can usually get a lower interest rate at a bank than a dealership, especially if you are an existing bank customer. They'll probably require a 10-20% down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car.
- Credit Unions Credit unions have lower overhead costs than banks. This allows them to offer lower financing.
- Home Equity Loans You need to own a home to get a home equity loan. Here, you use your home as collateral for the loan, which is a little bit scary. If you can't pay the loan, it is possible that the lender could commence proceedings to sell your home.
As with everything else these days, you can shop for car loans on the Internet. You miss out on any kind of personal relationship, but you can get quick approval and very competitive pricing.