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The Costs Of An Auto Loan

When shopping for a car loan, these three things determine the cost:

  • The finance charge, expressed as an annual percentage rate (APR)
  • The term, or length of time the of the loan
  • The principal, or amount you borrow


The APR (annual percentage rate) is a percentage of the loan principal that you pay every year to your lender. This finance charge includes interest and any fees for arranging the loan, with this charge being added to the total amount you borrow. Typically, if you make minimum payments on your loan with the addition of the APR interest, you pay extra to borrow the money to initially buy the vehicle.

When looking for a vehicle loan, look for the lowest auto loan interest rate for the term you want. The higher the rate, the more borrowing will cost you.

The Term

The term of your loan also affects what it costs you to borrow. A shorter term means you’ll pay higher monthly payments, but have a lower total cost. On the flip side, a longer term means you have smaller monthly payments, but a higher total cost.

Although, you still might choose the longer term, and the higher cost, if you can manage the smaller payment more easily than the larger one. It can be worth it to pay a little more over time if you’re worried that you might default on your payments.

The Principal

The more you borrow, the more borrowing will cost you. After all, the finance charge is determined by multiplying the interest rate times the principal. So the more you can reduce your principal, the more affordable borrowing will be.

To cut down on your overall cost, make the largest down payment you can afford so that you reduce your interest costs. Looking for a car that will have a good trade-in value, and trading it in while it’s still in good condition, will help you save money later on as well.

Other Costs

Keep in mind that the cost of insurance will vary depending on the kind of car you want to buy, your age, gender, and driving record, where you live, the insurance company you choose, and the coverage you want.

This article was written with support from Banzai Financial Literacy. To learn more about Banzai and Dort Financial’s commitment to providing free financial literacy to the community please visit: