What a Car Loan Costs
For example, if you take a $15,000 auto loan from your credit union with a 7.5% APR that you repay over four years, you'll owe $362.69 every month. Over a year, those payments would total $4,352.28, and over the life of the loan, $17,409.12. That means it costs you $2,409.12 to borrow the money to buy the car.
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.
Most APRs you'll be offered will be in the same ballpark. That's because the cost of borrowing at any given time depends on what lenders themselves have to pay for the money they're using to make loans. But credit unions, which aren't trying to make a profit, or the financing arms of car companies that want to promote the sale of their cars, might offer lower rates.
For example, the same $15,000 loan at 7.5% APR that cost $362.69 a month for a four-year term would cost $466.60 a month for a three-year term and $300.57 for a five-year term. But the three-year term would cost you just $1,797.60 in finance charges — $611.52 less than the four-year loan. And the loan with the five-year term would cost $3,034.20, or $625.08 more than the one with the four-year term.
Sometimes, though, you still might choose the longer term, and the higher cost, if you can manage the smaller payment more easily than the larger one. After all, it can be worth it to pay a little more over time if you're worried that you might default on your payments.
But keep in mind that a car might start to cost you money for upkeep after it reaches a certain age or you've driven it long distances. You don't want to choose so long a term for your car loan that you'll still be paying it off while also having to pay for major repairs.
It should come as no surprise that the more you borrow, the more borrowing will cost. After all, the finance charge is determined by multiplying the interest rate times the principal. So the more you can reduce your principal, the more affordable borrowing will be.
One thing you can do to cut down your overall cost is to make the largest down payment you can afford so that you reduce your interest costs. Looking for a car that will have a good trade-in value, and trading it in while it's still in good condition, may also help you save money later on as well.