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Components of a New Auto Loan

Understanding the different parts of a new auto loan will make finding competitive offers much easier. Read on for an explanation of the basic components of new car loans.

Down Payment

The down payment is the amount of the vehicle's price that you will pay in cash. The larger your down payment, the smaller your new auto loan will be. If you finance at the dealership, your trade-in may be used as your down payment or at least to supplement it. If you finance through an independent lender, you will not have to discuss your down payment; you will just reduce the amount you borrow by how much you intend to pay the dealer in cash. Try to make a down payment of at least 20% of the car's total price.

Annual Percentage Rate

The annual percentage rate (APR) of your new auto loan expresses the interest rate combined with any other fees and charges. In other words, the APR is an expression of the car loan's total cost. When you compare loans for new autos, APR should be your primary consideration. APR is the most consistent and accurate way to size up new auto financing deals. If you find a lender that only advertises the interest rate of a loan, ask for the APR. When you go forward with the loan, the APR will also be listed on your loan documents.

Monthly Payment

This component of a new auto loan is what usually concerns borrowers the most. Even though the monthly payment is not the most critical part of new auto loans, it is still important to know. Understanding your monthly payment will help you determine if you can fit it into your monthly budget. The payments you make on your auto loan each month will be devoted partially to the principal of the loan, or the amount you originally borrowed, and partially to the interest of the loan. You can request that your lender provide you with a breakdown of principal and interest payments if you wish.

Term

The term of a new auto loan refers to the amortization period, or the time over which the cost of the vehicle is spread. Common terms for new car loans are 36, 48, and 60 months. Loans with 24-month periods are available, but they tend to have very costly monthly payments. Similarly, long-term loans for new autos are also available, but they will have very high interest expenses.

Penalties

Every auto loan will contain some type of penalty. Your new auto loan will assess certain penalties for late payments and may even penalize you for premature repayment. Prepayment penalties are assessed when the borrower pays off the loan earlier than originally agreed. The lender loses money on interest when this happens, which is why some lenders charge early payment penalties to offset the loss.