About principal and interest
If you purchase a new or used car with a loan, you agree to pay off the loan amount (principal) over a specified number of months. But you also agree to pay a finance charge, or interest, for the privilege of using the bank’s (or finance company’s) money for your purchase.
The amount of finance charge that you pay is the interest rate, which is set by the bank or finance company based generally on national lending rates and more specifically on your credit score. Interest rate is expressed as a annual percentage rate (APR), such as 5.5%.
Interest rates can be different for the same loan amount
Wholesale lending rates are lower now than in recent years but banks and finance companies, as well as dealers, can boost these rates (called reserve) for their customers. You can check current national average auto loan rates at Bankrate.com. At the time of this writing, the average 36 month new-car loan rate was 3.93% — very low. But automotive consumers may pay higher rates depending on the lender, dealer reserve, and the customer’s credit score.
Auto buyers should always know their most recent credit score before going car shopping. Otherwise, dealers know more about you than you know about yourself, which could lead to some unpleasant surprises. Getting your credit score is easy enough online. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
Continue reading How Car Loan Payments Work
How Are Car Payments Calculated?
Car payments are based on how much you borrow, the interest rate, and the length of the loan.
The more you borrow, the higher the payments. The higher the interest rate, the higher the payments. The longer the loan, the lower the payments.
Unfortunately, the formula for calculating monthly car payments is not a simple one and can’t be easily done by hand or by a simple calculator.
It’s necessary to use an electronic business calculator, or by using an online Car Loan Calculator.
Simply plug in the numbers and get your answer.
Continue reading How Is a Car Payment Determined?
First-time car buyers are often unaware of everything that’s involved in the process. It’s not surprising because it’s not simple and not like buying anything else that we normally buy, even a house.
We’ll explain it all in this quick guide to buying a car. Further details can be found in the various articles posted on this web site.
1. Decide on a Car
Choosing a car for the first time can be a bewildering experience because there so many choices — old cars with lots of miles on them, newer cars with better safety and tech equipment, small cars, compact cars, sedans, coupes, large cars and SUVs, sports cars , fast cars, fuel-efficient cars — not to mention all the different makes, models, and styles that are available.
Decide what kind of car you want or need and what’s important to you. Do you want good looks, safety, good gas mileage or high performance, automatic or manual transmission, 2-wheel drive or 4-wheel (for winter weather), sporty 2-door coupe or 4-door sedan or convertible, passenger car or roomy SUV or minivan? Do you want good reliability and dependability, and low insurance cost? What is is your budget and how much can you afford, either as a cash purchase or as monthly loan payments?
Continue reading Quick Guide to Buying a Car
How Does Car Leasing Work?
Car leasing is extremely popular because it offers a more affordable method of auto financing. It allows you to have lower monthly payments than with traditional auto loans. About one out of every five vehicles driven by automotive consumers in the United States are leased.
But car leasing is not for everyone. Is leasing good for a teen’s first car? What are the pros and cons of leasing?
Leasing is a little more complicated than buying with a loan, so you should take the time to learn about leasing, and be sure it’s right for you before making a decision.
What is a Lease?
Both leasing and buying a car with a loan are simply two different methods of financing. Where a purchase loan is a method of financing the ownership of a vehicle, leasing is financing the use of a vehicle for a specified number of months, similar to renting but not quite the same thing. Continue reading Basics of Car Leasing
Refinancing your car loan can often lower your monthly payments.
Auto loan interest rates are hovering at the lowest rates seen in many years. If you are currently paying a high rate, you may be able to benefit by refinancing at a lower rate.
Depending on the value of your car and the amount you owe on your loan, you might even be able to refinance and get cash back out of the deal.
Refinancing an auto loan is similar to getting any other used-car loan. You might refinance with the same company with which you have your current loan, or you might go to a different bank or loan company.
If you bought your car new and financed your loan through the car manufacturer’s “captive” finance company, you might find that the company does not do refinance loans. In this case, you’ll have to go to a bank or loan company for your loan.
Loan rates vary between different banks and finance companies. Refinance rates are usually higher than new-car rates, but lower than ordinary used-car rates. Shop around for the best rates.
Continue reading Can I Refinance My Car Loan?
How do I know how much car I can afford?
Assuming you’ll buy with a loan, you will want to have a monthly car payment that will fit within your current income, after considering all your other expenses. Don’t make the mistake of buying based on future expectations — a forthcoming raise, a new job, or other potential improvements in your finances. Your expectations might not come to reality and you’ll be stuck with a car you can’t afford. Base your purchase only on current, stable finances. Continue reading Can I Afford This Car?
Figuring car payments is easy if you have the right calculator — it’s not easy math otherwise
Car payment calculation is not simple math. It requires a rather complex business math formula that is not easily done by hand and most people are not capable, or not willing, to take it on. It’s not as simple as dividing loan amount by the number of months in the loan. Finance charges (interest), which change every month, must be accounted for.
It’s much easier to use a hand-held business calculator, such as the HP 12c or HP 17b, or, even better, use an easy online auto loan calculator which does the math for you.
To use a car loan calculator, you must know the amount being financed, the number of months you want to finance, and the interest rate. You’ll also need to know the down payment amount, if any, and the value of your trade-in vehicle, if any. You also need to know the sales tax rate that applies to your home location, not where you buy your car. Continue reading How Are Car Payments Calculated?
A Car Loan Story
David, 17, recently graduated from high school, landed a good paying job, and wanted to buy a new car.
His thought was that he would go to his neighborhood Ford dealer where he had been admiring a bright red Focus model that he felt he could afford, and arrange for a convenient loan to pay for it. He could easily get approved for the loan because his father knows the owner of the dealership.
The car cost $12,000 with discounts and rebates. He thought a 5 year (60 months) loan would be about right because he figured payments to be $200 a month ($12,000 divided by 60 months), which he could easily afford.
David was wrong — in many ways. Let’s see why. Continue reading Car Loan Basics for First Time Car Buyers
Is it possible to get a car loan and buy a car with no credit?
The answer? Yes, under some conditions. Let’s explain.
It is a common situation, especially with young people who have never had a loan, never had credit cards, or never borrowed money for a car. Without a history of prior loans and payments, there is no credit history and no credit score, which is the number that represents credit rating.
In fact it is not quite sufficient to simply have a good credit score to get a car loan — or any loan. You may also need to have an established steady income (a job) and no excessive debts. You should have no recent bankruptcies or auto repossessions, which you wouldn’t be likely to have anyway if you have no credit.
So how is it possible to buy a car with a loan when you have no credit record and no credit score? Continue reading How to Buy a Car With No Credit?
What are the advantages and disadvantages of car leasing?
Car leasing has it’s advantages and disadvantages. Here is a summary:
– Get new car every 2-4 years, with latest features and safety equipment
– Lower monthly payments
– Usually no down payment
– Car is always under warranty
– Lower sales tax (in most states)
– Avoids used car selling/trading hassles
– Automatic GAP insurance included (most leases) Continue reading Car Leasing – Pros and Cons
There’s one kind of car buying customer that sales people just love. They are “payment buyers.”
A car salesperson’s job is to sell cars — and make maximum profit for his dealership. The way to make maximum profit is by selling at the highest possible prices and including as many “add-on” extra items or services as possible.
Some customers are an easy sale but are difficult to make a big profit from. Others are easy on both counts. The latter of these two types are the kind of customers that car salespeople love.
A salesperson’s dream customer is one who has done little or no research about cars they might be interested in, understands almost nothing about the car buying process, knows little about car pricing, has few negotiating skills, but most of all, wants to negotiate monthly payments, and only monthly payments. These customers are called “payment buyers.”
Continue reading Are You a Car Salesman’s Dream Customer?
Although we’ve discussed this topic previously (see Lease vs Buy), there is one aspect that we haven’t discussed and continue to hear questions about.
The question is essentially this: “If a car dealer is offering a special promotional lease deal, a purchase rebate, and a low interest loan on the car I want, which one is the best deal?”
The short answer to this question is that the lease deal will nearly always be better — and it’s not simply because monthly payments are less. If the lease deal is one that is being offered by the car manufacturer, the company has usually applied a price discount, a low money factor (finance rate), and a high lease-end residual value. The combination of all these things makes for an attractive low monthly payment. Customers are not able to negotiate these kinds of deals for themselves because a dealer only controls one of those three things — price.
Continue reading Is It Better to Lease or Buy a Car?