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How to Find the Best Auto Loans

By Mindy

Shopping around for the best auto loans can be overwhelming. Yet shopping around is important to make sure you find the best auto loans for you. Find out below how to compare lender offers against one another. When you understand these easy techniques, you’ll be able to compare lender forms and offers against each other so you can choose the best auto loan for your needs.

Understand the basics of the best auto loans

The first thing you have to realize when shopping around for the best auto loans is that not all loans are created equal. Contrary to popular thought, it’s not all about the interest rate. Finding the best auto loans for you is actually dependent on multiple factors.

Each lender you visit to apply for an auto loan will have its own unique way of presenting an auto loan. Lenders do not use the same terms for loan conditions and they often present loan offers in different formats. If you want to be able to compare loan offers against each other, you first need to understand a few loan basics. Listed below are some of the terms (and variations of terms) you’re most likely to run into.

• Up-front fees:  Also called loan origination fees and processing fees. All you really need to be concerned with is the total of these fees. Don’t worry about the individual fees charged by each lender. Lenders have their own unique reasons for stipulating loan fees, and you’re not likely to have any of the fees removed. Instead, focus on the total of all the fees. Look at each loan offer you have and add up the fees. Compare the different fee totals to figure out who charges less in fees.
  
• Annual Percentage Rate:  Also known as the APR of a loan. The APR will tell you how much the loan will cost you on a yearly basis. It is actually expressed as a percentage based on the original amount of the loan (also called the principal). The APR is made up of the loan interest rate combined with all lender-imposed charges and fees. The lower you can get your APR, the better.
  
• Prepayment privileges:  It’s nice to think you might be able to pay off your loan quicker than originally anticipated. But be careful, because some lenders won’t let you do this. Think about it – if you pay off your loan early, you’ll save hundreds or thousands of dollars in interest payments. Which means your lender will lose hundreds or thousands of dollars in interest profit. Many lenders allow you to make extra payments on your loan, but the number of extra payments allowed may be limited on a yearly basis. Find out whether the loan you’re considering allows extra payments. If such a payment privilege doesn’t exist, ask for one. It never hurts to try.
  
• Penalties for early-discharge:  Some lenders impose penalties if you try to pay your loan in full before the loan’s maturity date, or date of final payment. Again, lenders don’t like to lose out on many months of interest profits. An example of an early-discharge penalty would mean having to pay a few months’ extra in interest charges. When comparing loans, look for the one with the lowest penalty.
  
• Total loan cost:  Also called the sum of all the monthly payments. This total sum is made up of all the payments you will make over the life of the loan. This includes payments made on the principal balance and payments that go to fees and other charges. When trying to choose the best loan for you, it’s always better to compare total loan cost than it is to compare monthly payments. You can have a loan with low monthly payments that total up to a much higher figure over the long run than a loan with higher payments for fewer months.

How lenders calculate APRs

Lucky for you, there is a federal Truth in Lending Act that requires all lenders to use the same method to calculate their APRs. Lenders are also required to use bold print in consumer loan agreements when communicating an APR to a lender. This makes it much easier to compare multiple loans against each other.

Because APRs combine interest rates and total fees, comparing APRs puts different loans on equal footing. If you simply compare interest rates or total fees alone, you may not get the whole picture. For instance, if one loan has a low interest rate with high fees, it may seem at first glance that it’s cheaper over the long run. But that’s not always the case – it depends on how the higher fees compare to the charges of the lower interest rate throughout the life of the loan. Because the APR factors in both interest rate and fees, you’re saved from having to worry about the calculations. You can compare combined fees and interest simply by comparing APRs.

Shorter loans are sweeter

Always go with the shortest-term loan you can comfortably handle. There are two reasons to do this:

• Lower total interest paid. Say you have a choice between a 36-month loan and a 60-month loan. Both loans are for $12,000 and both have an interest rate of 6.5%. If you go with the 36-month loan, your monthly payments will be $367.79. The 60-month loan will give you monthly payments of $234.79. The 60-month loan seems more attractive at first glance because of the lower monthly payments. Yet, lower monthly payments spread out over a longer term means more interest will be charged over time. With a 60-month loan, you’ll pay a total of $2,087.63 in interest. The 36-month loan will total only $1,240.37 in interest.
  
• Depreciation. If you buy a new car, it will depreciate substantially the first year you own it. This means it will go down in value by a large amount in the first 12 months it is driven. If you have a long-term loan, your monthly payments will be small and the loan will take a long time to shrink in size. Your car may go down in value faster than your loan balance drops. If this happens, you could potentially owe more money on the loan than your car is actually worth.

Big picture comparisons are worth it

When comparing best auto loans, be sure to look at the big picture. Calculate the total loan costs. Compare the APRs. Look for prepayment privileges and penalties for paying off your loan early. Factor in the different terms (lengths) of each loan. Knowing all these elements will help you see the big picture, which will ultimately help you pick the best auto loan for you.

8/6/2008

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