Everyone likes to get a good deal. When you are offered a low monthly payment on your car loan, that might seem like the best deal of all. In the long run, however, that low monthly payment might actually end up costing you hundreds of dollars more than you intended to pay. In order to understand the true total cost of car loans, you must look at three different factors.
The initial amount you borrow is called the loan principal. The amount of principal you have left at the end of every billing cycle is one half of the equation that determines how much you will pay in interest. To lower the total amount you pay on the entire loan, it is a good idea to start with a lower principal. If you are able to pay 20% of the initial $25,000 cost in a down payment, that is $5000 of the purchase price that never figures into the interest you are charged.
The other half of the interest equation is the interest rate itself. Bargaining for a lower interest rate can significantly reduce the price you ultimately pay for your next vehicle. A great credit score and other factors, such as dependable income, can lower your risk factors with the lender and thus can result in a lower APR, saving you a great deal of money.
A lower monthly payment might be tempting. When you accept a lower monthly payment, however, you are lengthening the term of your loan, postponing the date when the car will be paid off and costing yourself a lot of money in the process. You will pay significantly less interest with a 2- or 3-year loan term than with a 4-year loan.
When negotiating the terms of car loans, fight the urge to take it easier than your monthly budget can handle. Factor in the amount, rate and term of your loan to get the best deal overall.