How Does an Auto Loan Work?
When you finance a vehicle, you borrow a specific amount from a lender and agree to pay it back over a set period (the term) with interest. Most auto loans are simple interest loans, meaning interest is calculated on the remaining principal balance.
[Image of a diagram showing the components of an auto loan: principal, interest, down payment, and fees]Key Factors in Your Car Payment
- Vehicle Price: The total cost before taxes and fees.
- Down Payment: Cash you pay upfront. A higher down payment reduces your monthly cost and total interest.
- Loan Term: Common terms are 36, 48, 60, or 72 months. Longer terms lower monthly payments but increase total interest paid.
- Interest Rate (APR): The yearly cost of the loan. Your credit score is the biggest factor here.
Don't Forget Sales Tax and Fees
Many buyers forget that the "out-the-door" price includes state sales tax, title fees, and registration costs. Our calculator allows you to factor in these percentages to ensure your budget is realistic.
The 20/4/10 Rule
Financial experts often recommend the 20/4/10 rule for car buying:
- Put at least 20% down.
- Finance the car for no more than 4 years (48 months).
- Keep total vehicle costs under 10% of your gross monthly income.