The monthly payment is the number most of us focus on, and the one that is easiest to manipulate. Stretch the loan term and the payment shrinks, but the car gets more expensive. To compare offers fairly, you need to understand three things: APR, term and total cost.
APR is the price of the loan
The annual percentage rate (APR) is the yearly cost of borrowing, including interest and certain lender fees, expressed as a percentage. It is the best single number for comparing loans because it standardizes different structures. Your rate depends mainly on your credit profile, the length of the loan, the age of the vehicle and the size of your down payment. New-car loans often carry lower rates than used-car loans, and manufacturers sometimes offer promotional rates on specific new models.
Term trades payment for interest
The term is how long you take to repay the loan. Longer terms lower each payment, but you pay interest for more months, and you stay exposed to the risk of owing more than the car is worth. Here is an illustration for a $35,000 loan at 6.9 percent APR with no down payment:
- 48 months: about $837 per month and roughly $5,150 in total interest.
- 60 months: about $691 per month and roughly $6,480 in total interest.
- 72 months: about $595 per month and roughly $7,840 in total interest.
- 84 months: about $527 per month and roughly $9,230 in total interest.
Going from 48 to 84 months cuts the payment by about $310 but adds roughly $4,000 in interest. These figures are illustrations that leave out taxes and fees, and real offers will differ.
Ask about the total cost first and the monthly payment last. The payment is a result, not a price.
What credit does to the rate
Take the same $35,000 over 60 months. At a rate near 4.9 percent, typical of a strong credit profile, the payment is about $659 and total interest is about $4,530. At a rate near 10.9 percent, the payment climbs to about $759 and the interest to roughly $10,550. Market rates move around by lender and by month, so use these numbers only to see how much the rate matters: a few points of APR can add thousands of dollars over the life of the loan.
Counting the total cost
The total you pay is your down payment, plus every monthly payment, plus any fees and add-ons financed into the loan. Extras such as extended service contracts, GAP coverage and paint protection can be worthwhile for some buyers, but they are usually optional. If they are rolled into the loan, you pay interest on them as well, so ask for each one to be priced separately.
Practical ways to pay less
- Get pre-approved first. An approval from a bank or credit union gives you a benchmark. The dealer may beat it, and if not you already have a good alternative. Several auto-loan applications in a short window are generally treated as a single inquiry by common scoring models, but check how it works with your lender.
- Put more down. A larger down payment reduces the amount borrowed and can improve your rate. Aiming for 10 to 20 percent on a new car is a common rule of thumb.
- Choose the shortest term you can comfortably afford. Five years or less is a widely used guideline for a new car, and shorter for a used one.
- Read the contract. Look for prepayment penalties and for any item you did not ask for.
- Improve your credit if you can wait. Paying down card balances and correcting errors on your report can move you into a better tier.
Test the numbers yourself
The finance calculator on each Driveway listing lets you change the price, down payment, credit tier, APR and term, then shows the monthly payment, total interest and a payment-by-payment schedule. Run it for two or three different terms before you talk to a lender, and bring the results with you. Knowing your own numbers is the best negotiating tool there is.
