Whether you’re 18 or 48, at some point you’re likely to buy a new car – even if it’s just new to you. Unfortunately, cars aren’t cheap. That’s why many people go for an auto loan.
The issue? Auto loans are confusing, especially if you’ve never had a loan before.
Between APR, GAP, MBP, terms, and down payments, you’re basically swimming through an ocean of acronyms and words that might not make sense to you. And that’s okay! I didn’t know the answers at first, either. We’re here to help make sense of it.
So, here are some things I learned at 23 with my first car loan (and by virtue of working at Visions).
All about that APR
APR. The thing most people see first. APR is an acronym, meaning “Annual Percentage Rate.” Most people just call it the interest rate, though.
If you’re not familiar with loans, your APR is how much the institution will charge you to take out a loan. And, while APR and interest rates are technically a little different, it’s the interest charge and subsequent payment that you need to think about (more on that later).
What determines my APR?
Your APR varies based on many things – your credit score being the biggest factor. The better your credit score, the lower your APR is likely to be. That’s because lenders look at credit scores as a form of financial trust. With a higher credit score, they figure they’re more likely to be paid back, thus the lower rate.
Does the APR matter?
Yes. Yes it does. Check out the Payments section.
Alright, give me the term
In the lending world, “term” can mean many things – your agreement, what you promise to abide by, stuff like that. But when people mention “rates and terms,” they’re typically talking about how long you’re taking the loan out for. Generally speaking, the longer the term, the higher the APR. Which leads us to our next section…
Payments – it ain’t just the monthly stuff
Alright, you’ve gotten this far. Let’s talk numbers.
The biggest thing to worry about: your monthly payment. But it’s not so cut and dry as what you pay each month. This is where your terms and APR come in (told you I’d come back to it).
For an example, let’s say you plan to borrow $15,000 for your new car. You have a good credit score, so your APR is 2.5%. And, when it comes to the term, you don’t want to pay on it for more than five years.
$15,000 borrowed at 2.5% APR for five years brings your payment to about $266. Maybe you wanted to keep it below $250, though. In that case, you could ask if there are longer terms available – which, as you now know, typically come with a higher APR.
So, new example. Now you’re looking at a six year loan at 3.5% APR. That brings your payment down to a cool $231. It puts you below your budgeted amount with extra money for gas, to boot. (If your head is spinning, check out our auto loan calculators. They’re super sweet.)
The real cost of that rate and term
Still reading? Cool. Remember when I mentioned how much the institution would charge you to take out the loan? Double cool.
Time to translate those examples into the lifetime interest charge:
- Five years, 2.5% APR = around $975 in total interest
- Six years, 3.5% APR = about $1,650
So, to reiterate: longer term + higher rate = the more you’re going to pay. Whether it’s worth having the extra cash each month or to pay more over time – that’s up to you. Just remember that you can always pay more than your standard payment, but you can never pay less. So, if you opt for the cheaper payment and pay extra, you’re going to pay it off sooner and pay less overall.
What if my credit is poor?
Well, you’re going to pay more. Sometimes significantly more.
Take that five year, 2.5% loan and bump your APR to 6.5, and your new payment is about $293. More than that, you’re going to pay a little over $2,600 across those five years.
Remember, though: you still have a car and you’re working toward a credit score you can be proud of. It’s something that’s worthwhile in the end. And, if you want to learn more about credit scores, click here. Don’t feel like reading more? Watch this handsome guy on YouTube (me) talk about credit basics and how to build and rebuild it here.
And, don’t forget about coborrowers. If you have a family member or someone you trust with a solid credit score, their good score can outweigh yours, leading to more favorable terms.
The extra stuff
Here are three more things to consider when you’re picking out your next ride:
- Insurance. You’ll need it for an auto loan and Visions provides our members with discounted rates
- GAP, or Guaranteed Asset Protection. This optional coverage can help make up the difference in what you owe versus what your vehicle is worth in case of a loss or theft. Because of rates and terms, an insurance settlement doesn’t always cover everything – that’s why GAP is so valuable (and you can finance it into your loan payment)
- MBP, or Mechanical Breakdown Protection. Think of it as warranty coverage – valuable peace of mind that can typically be financed right into your loan, too
Your lender matters
Learn more about our auto loans here and give us a call at 800.242.2120 if you have any questions.