Auto Loan RatesAuto Loan Guide Step 3: Finding the Best Auto Loan RatesBy: Meghan Carter
When you start looking for auto loans, you will find that all auto loans have two different types of auto loan rates: interest rates and annual percentage rates (APR). On each auto loans, those auto loan rates will be different. For example, a $20,000 auto loan may have an interest rate of 7% and an APR of 9%. Why Are the Two Auto Loan Rates Different? When you look at the interest rate, you are looking at how much your lender is charging you to borrow the money. The interest rate is used to calculate how much interest you must pay. If interest was all that you had to pay when you take out an auto loan, then it would be easy to find the cheapest loan. All you would have to do is look for the auto loan with the lowest interest rate. However, interest is not all you have to pay. In addition to being charged to borrow money, you will also have to pay additional fees. Those additional fees will vary lender to lender. I know what you are thinking, so what? All I need to do is find the lender that offers the lowest interest rate and lowest fees, right? Unfortunately, it's not that easy. You see, lenders want to trick you into thinking they have the best deal. So some lenders will say they aren't charging you any loan fees, but charge you an inflated interest rate; whereas, other lenders will charge a really low interest rate, but have very expensive fees (Morris 44). As a result, it makes it very hard to determine which lender has the best offer. After all, could you decide whether a $20,000 auto loan with no fees and an 8% interest rate is better than an auto loan for the same amount with $2,500 fees and a 7% interest rate. Yea, it gets pretty confusing. To help you out, the government decided that there needed to be an easy way for consumers to compare loans. So, in the Truth-in-Lending statement, the government specified that lenders must disclose the APR auto loan rates, which is a simple way of showing you how much the loan will actually cost per year (Morris 44). Typically, the APR is higher than the interest rate because it includes both the interest rate and upfront fees charged by the lender (Guttentag 19). It sounds really great, doesn't it? You only have to look at one thing to tell if the loan you are getting is the cheapest one available. The bottom line is that when you compare auto loan rates, the rate you should be looking at is the APR, not the interest rate (Faerber 136). That's because some lenders may try to fool you by offering very low interest rates, but charging ridiculously high fees. When comparing APR auto loan rates, make sure you ask to see what fees weren't included. Once you've taken account for the fees that are missing, choose the auto loan with the lowest APR because it is the cheapest. The Rest of Our Auto Loan Guide: Introduction to Our Auto Loan Guide Step 1: The Car Loan Basics Step 2: Judging Which Auto Loans You Can Afford Step 3: Finding the Best Auto Loan Rates Step 4: How Your Credit Score Affects Your Car Loan Rates Step 5: The Difference Between Used and New Car Loans Step 6: The Best Places to Find Car Loans Step 7: Negotiate on the Lot to Lower Your Auto Loan Costs Step 8: Prepayment Terms and Automobile Loans Step 9: Traditional and Online Auto Loans Fact Sheet Sources:
Faerber, Esme. The Personal Finance Calculator. New York: McGraw-Hill, 2003. Guttentag, Jack. The Mortgage Encylopedia. Madison, Wisconsin: CWL Publishing, 2004. Morris, Kenneth M., and Morris, Virginia B. The Wall Street Journal Guide to Understanding Personal Finance, Fourth Edition. New York: Lightbulb Press, Inc., 2004. |
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