Surveys repeatedly conclude most vehicle buyers rely on auto loan financing to afford the purchase of a new car. That’s understandable, considering cars are big-ticket items and make the short list of most people's biggest purchases. Many consumers are fixated on securing a car loan with the lowest possible monthly payment. A smarter approach is to negotiate a car loan that ensures you pay the lowest possible price for your new car over the long term.
Car Loans: A Brief Vocabulary Lesson
Understanding your monthly car loan payments gives you the power to negotiate the best deal for your specific situation. Here are some phrases you’ll hear related to your loan. More importantly, here are definitions of what those phrases mean.
- Annual percentage rate (APR). The APR refers to the interest rate you will pay on your loan. In other words, the APR represents the price you will pay for the convenience of paying for your car over time, rather than all at once.
- Loan amount. This refers to the amount of money you are borrowing to buy your car. It’s the dollar amount you owe after your trade-in and down payment are subtracted from the price of the car.
- Loan term. This is how much time you have to repay the loan amount. Typically, a car loan term ranges from three to six years. The longer the loan term, the more you will pay for your car over time. However, the longer the loan term, the lower your monthly payments will be. That’s why there is no one-size-fits-all answer to the question, “How much do car loans cost?”
- Loan to value (LTV) ratio. Simply put, this is like a safety net for both you and your lender and ensures a lender won't approve a loan for more than the value of a car. The LTV ratio is determined by dividing the loan amount by the vehicle's value.
- Payment to income (PTI) ratio. Lenders that offer car loans use your income to determine the monthly payment amount you can afford. Most lenders prefer that your combined car and insurance payment does not exceed 15% of your gross monthly income (that figure is your PTI ratio.) If your gross monthly income is $1,800, for example, most lenders would not approve a loan locking you into a $300 per month car payment.
- Debt to income (DTI) ratio. Lenders compare how much money you owe on your mortgage, credit cards, or other loans with your income. This helps them determine how much you can afford to pay per month for a car loan.
Tips for Reducing the Cost of Your Car Loan
The more you can chip away at the principal you owe on your loan, the more quickly you can pay it off and lower your interest fees. The sooner in the month you pay your loan, the more of that payment will go toward paying down the principal balance. The more money you can use for a down payment, the less interest you will incur. The better your credit score, the better interest rate you will get. The more quickly you pay off the loan, the less you will pay over time.
Options for Getting a Car Loan
If you have cash on-hand to pay outright for a new car, that’s great! If not, you’re in the majority of people who need a car loan to buy a new car. Essentially, you have three options for securing a loan:
- Banks and credit unions
- Car dealerships
- Online loan providers
Each option has its pros and cons. Good advice for making any financial decision is to do your research.
If you live in or around Hamburg, NJ, and are in the market for a high-quality pre-owned vehicle, contact us at DeBoer’s Auto Sales & Service. We have made it easy for you to research financing options via our electronic credit application and online loan calculator. We also encourage you to stop by and discuss your financing options in person. Our goal is to make every customer a highly satisfied customer.
