How to Save Money on a Car Loan

When obtaining financing to buy a car, there are two factors that influence the total price of the car (1) time and (2) interest rate.  The following table shows rates of various lenders:
LENDER
APR
36 mths.
APR
48 mths.
APR
60 mths.
APR = Annual Percentage Rate
7.79%
7.54%
APR
36 mths.
APR
48 mths.
NEW CAR PURCHASES
USED CAR PURCHASES
7.59%
7.65%
7.99%
8.00%
8.49%
8.69%
8.49%
8.69%
9.69%
National Average
8.90%
9.07%
9.09%
9.86%
9.86%
9.86%
Does it really matter that much if you obtain a loan with Lender 1 or at the higher national average? On the next page are calculations made for both a 36 month and 60 month loan using the assumption that the amount of the car loan is \$20,000.  As you can see, paying a 1.36% higher interest rate resulted in paying \$452.52 more for the car.  Spreading the loan out over a longer period of time resulted in a bigger increase, \$894.00.  This increase is due, in part, because auto lenders usually charge a higher interest rate for longer term loans.
Lender 1
Lender 2
APR
60 mths.
9.49%
NEW CAR PURCHASES
Lender 2
National Average
Difference
Auto Lender
36 month loan
60 month loan
APR %
APR %
Payment
Payment
7.54%
8.90%

\$622.49
\$635.06
\$452.52*
7.54%
\$401.14
9.09%
\$416.04
\$894.00**
* 635.06 - 622.49 = 12.57 per month x 36 months = \$452.52
**416.04 - 401.14 = 14.90 per month x 60 months = \$894.00
1.36%
1.55%
The above illustration should convince you to do a little homework before you start shopping for a car.  The worst thing you can do is go into a dealership without knowing how much you can afford, without an estimate of your monthly payments.

Before you apply for financing, check the auto loan websites for their current rates, call banks and credit unions in your area and ask about their current rates.  Doing research, comparing loan terms and finding a lower interest rate before you start shopping can save you hundreds on the price of your car.

What effect does time have on the total price of an auto?

The calculations below illustrate the effect of time on total purchase price.  Although these figures are calculated using the same interest rate, in the real world, often the longer the loan term, the higher the interest rate.

Suppose you plan to borrow \$20,000 to purchase a new car and you have already been qualified for a loan at 7.54%.  The lender asks you if you want to pay the loan back over a three, four, or five year period.  If you choose five years, your payments will be lower; however, you're going to pay more for the total price of your car than if you chose a three year repayment schedule.  The cost of buying your car over time is noted in red.

3-year loan:  \$622.49 monthly payment x 36 months = \$22,409.64 (\$2,409.64)
4-year loan:  \$483.95 monthly payment x 48 months = \$23,229.60 (\$3,229.60)
5-year loan:  \$401.14 monthly payment x 60 months = \$24,068.40 (\$4,068.40)

Use the auto loan calculators to determine the auto loan rate that will save you the most money.
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