How do I compare auto loan offers? What should I look at besides the monthly payment?

When comparing auto loan offers to determine the best deal, focus on the annual percentage rate (APR), the interest rate and the length of the loan—and not just the monthly payment. If you don’t get the best deal available to you on the interest rate, you could end up paying significant additional interest amounts over the life of the loan.

The length of the loan term is also important in considering the overall cost of the loan. A longer loan term may mean smaller monthly payments, but you will pay more in interest over the life of the loan. You should consider carefully whether you want to lengthen the loan term just to get your monthly payments down. Making your loan term longer may not be worth the extra costs and you could be left with a vehicle that’s worth less than what you owe. So don’t focus on the monthly payment alone. The big picture is the total cost of the loan. The total cost of your auto loan depends on the cost of borrowing (interest rate and APR), which is reflected in your monthly payment and in how many months you will have to make that monthly payment (the loan term). In other words, how much you will pay overall depends partly on how long you will have to pay.

Understanding the parts of a loan—the amount the loan, the interest rate and the length of the loan—is necessary in order to negotiate the best auto loan for you. Negotiating the interest rate and the loan term are key factors in getting the best auto loan. You might want to use a loan calculator to help you with the math. There are a number of auto loan calculators available online. For example, Consumer Reports and the NADA Guides provide online auto loan calculators that may be helpful in evaluating and comparing the costs and terms of various auto loans.

Below is a sample comparison to illustrate how you will pay less in the long run if you have a shorter loan term. The table below assumes a $20,000 loan and an interest rate of 4.75%.

Loan Term Monthly Payment Total Interest Paid
36 months
(3 years)
$597 $1,498
48 months
(4 years)
$458 $1,999
60 months
(5 years)
$375 $2,508
72 months
(6 years)
$320 $3,024

While the longer loan term gives you a lower monthly payment, consider the total cost over the term of the loan. If you paid off a $20,000 loan in 3 years, you will pay $1,498 in interest. For a 6 year loan, you will pay $3,024 in interest—more than twice as much. Some financial advisers recommend keeping the length of your auto loan to 5 years or less, reasoning that the longer the loan, the more likely you will owe more than the vehicle is worth.

When you think about your auto loan, it is also important to think about the total cost of ownership for your new vehicle. Consider the costs that are higher for a new vehicle than for an older one (such as taxes and insurance) and other costs resulting from the purchase (such as annual registration fees). Maintenance and repairs may also factor into your calculations.

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