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True Cost of Auto Loans

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The True Cost of Auto Loans

One of the biggest mistakes car buyers make when it comes to how much their vehicles will cost is assuming their auto loans are the final number. However, monthly payments on car loans aren't the end-all. Buyers must take into consideration additional costs such as down payments, car finance interest rates, and even additional vehicle-related costs like car insurance.

Upfront Costs: Auto Loan Down Payment

Simply put, your down payment is the amount of money you pay up front when you purchase a vehicle.

Generally, the higher the down payment, the lower the monthly payments (and possibly interest rates) on your auto loan. Also, higher down payments can help offset the depreciation of your new vehicle.

Deferred Down Payments

When you make a deferred down payment, it means you don't actually pay the cash up front; rather, the down payment is factored into your monthly payment.

While this is attractive to some buyers (because they're able to pay an even larger down payment in smaller chunks over time), it's important to not agree to a down payment larger than what you can reasonably afford each month.

Trade-In Vehicles

Remember, if you have a vehicle to trade in, that trade-in amount can go toward your down payment.

One of the most popular tools for determining the value of your trade-in vehicle is the Kelley Blue Book (KBB). Simply check your car's value with a few details, like its:

  • Year.
  • Make.
  • Model.
  • Mileage.
  • Overall condition.

Hit the dealership with a little knowledge under your hood; this information is powerful when it comes to crunching numbers with the salespeople.

Total Amount of Car Loan

The total amount of your car loan is how much the lender (i.e. bank, credit union, or dealership) loans you to purchase the vehicle (not including the interest rates; see below).

In addition to circumstances such as your credit score and monthly income, lenders use various factors to determine how much money to loan you. Skip down to Using a Car Loan Calculator to estimate how much money you might get for your auto loan.

Auto Finance Interest Rates

Now we get down to the nuts and bolts of your auto loan.

While your auto loan is the amount of money the bank, credit union, or dealership is willing to lend you to purchase your car, the car finance interest rates are the add-on payments you make to the lender. Think of interest rates as a sort of incentive for lenders to loan you money. More simply put, interest rates are how lenders make money from your auto loan.

Interest rates are one of the most important factors when it comes to determining the total cost of your auto loan. Refer to our Auto Loan Rates page for more details on interest rates, including how to negotiate interest rates with the lender.

Using a Car Loan Calculator

An auto loan calculator is one of the easiest ways to get a preliminary idea of the total amount of money you'll spend on your auto loan or vehicle purchase (with the exception of extra costs like car insurance; see below).

DMV.org's auto loan calculator helps you by taking the retail price of the vehicle and estimating the:

  • Sales tax.
  • Annual interest rate.
  • Auto loan term (how long the loan will last).
  • Down payment.
  • Trade-in vehicle/value going toward the down payment.

Once our calculator has this information, it can estimate your car finance amount and monthly payments.

NOTE: These are just estimated amounts. You must work with your bank, credit union, or dealership for exact figures.

Additional Costs: Car Insurance

Nearly every state requires liability car insurance or proof of financial responsibility. You might not be aware that most lenders require you to purchase comprehensive and collision coverage on vehicles they are financing.

These coverages will help pay for certain damages to your car.

You should always factor in the cost of car insurance when determining the total amount of money you're spending on your new vehicle.

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