Auto Loans: Watch the Total

The story: Sam at the car lot

At a car lot, a seller pitches Sam a low monthly payment, and Sam compares it with a shorter credit union loan.

1. Narrator: Sam is 19 and picks out a used car for $12,000. Sam’s credit union already pre-approved a loan at an example 7% APR.
2. Seller: We can get you in this car for just $205 a month!
3. Sam: For how long, and at what APR?
4. Seller: Seven years, at 11%, with nothing down.
5. Narrator: That’s 84 payments, about $17,260 in total. And the car will lose value faster than the loan shrinks.
6. Narrator: Sam’s credit union loan: $2,000 down, 4 years at 7%. A higher payment, about $239, but about $13,490 in total.
7. Sam: The low payment was hiding the total. I’ll go with my own financing.
8. Narrator: Short loan, real down payment, your own financing.

What you’ll learn

1. Three numbers that matter

   An auto loan’s cost depends on three numbers. The term is how long you have to pay it back. The APR is the yearly cost of borrowing, as a percent. A down payment is cash paid up front, so less is borrowed. A quote that only names a monthly payment may be stretching the term.

2. Get pre-approved first

   A pre-approval is a loan offer from a bank or credit union before you shop. It gives a rate to compare. Dealers can arrange financing too, but they can mark up the rate and keep part of the extra.

3. Negative equity

   Cars lose value fast. On a long loan with little down, it’s easy to owe more than the car is worth. That’s negative equity, or being upside down. If the car is sold or totaled, money could still be owed.

4. GAP insurance

   GAP insurance covers the gap between what’s owed and the car’s value if it’s totaled or stolen. It matters most with long loans and small down payments. Prices vary, so it’s worth comparing before buying it at the dealer.

Key words

APR

the yearly cost of borrowing, as a percent

Also called: annual percentage rate

term

how long you have to pay a loan back

down payment

cash paid up front so you borrow less

negative equity

owing more than the car is worth

Also called: upside down

Common questions

What if the dealer beats my pre-approval?

Then the dealer’s loan can be the better deal. Compare the APR, the term and the total, and check that no extras were added to the price.

Remember this

Short loan, real down payment, your own financing.

Try it: Price the sample car

1. Open the loan payment calculator.
2. Enter the sample used car: $12,000, $2,000 down, an example 7% APR.
3. Compare a 4-year and a 7-year term: the payment and the total interest.

The whole mission: no account or app needed.