Financing a Car? These 3 Numbers Matter More Than the Monthly Payment
Car prices have shot up 30% since the pandemic, according to Fortune. And with five-year car loan rates jumping from 4.52% in 2022 to 7.52% today, per Federal Reserve data, car buyers face skyrocketing monthly payments from both sides.
Unfortunately, that’s led many car buyers to make dangerous compromises, and these can end up costing them far more in the long run.
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Keep a close eye on three numbers as you explore your next car payment, rather than fixating on the monthly payment alone.
1. APR
The annual percentage rate (APR) includes the total cost of financing — not just the interest rate. It helps reveal hidden or upfront fees charged by the dealership to pad their profits for the sale.
If the APR exceeds the car’s depreciation rate, you’ll often become upside-down on your loan as the car loses value faster than you pay down the debt.
2. Loan Term
Dealerships love to pitch you on longer loan terms. After all, it reduces the monthly payment while letting them sell you a more expensive car than you thought you could afford.
It also lets them charge a higher interest rate, so they come out ahead on both ends of the deal.
As tempting as those lower monthly payments look, you’ll pay thousands of dollars more in interest. For example, imagine you go to finance a $30,000 car with a 48-month loan at 6% interest. Running those numbers, that would mean you’d pay $704.55 a month, with a total life-of-loan interest of $3,818.44.
A $30,000 loan stretched over 72 months at 8% interest would reduce the monthly payment to $526, but more than double the life-of-loan interest to $7,871.80.
3. Total Cost of Ownership
That much higher life-of-loan interest adds to the total cost of ownership, but it’s far from the only “hidden” expense that can creep in.
For example, Toyota Corollas cost more up front than Nissan Sentras, but the Sentra comes with thousands of dollars in higher total ownership costs, per Kelley Blue Book. Maintenance and repairs cost more for the Sentra than the famously-reliable Corolla.
How To Shop (and What Triggers Trouble)
Longer loan terms and higher APRs will cost you more interest in the long run. Aim for the shortest possible loan term and the lowest possible APR.
Don’t assume that the dealership will offer you the best loan terms, either. In fact, dealers often give you a choice between subsidized financing or a discounted purchase price. In many cases, you’re better off taking the lower price and aggressively shopping around for the cheapest loan.
Faster depreciation can also leave you upside-down on the car, making it impossible to sell without coming out of pocket. Look for vehicles that hold their value well, such as Toyotas, Lexuses, Hondas and Acuras.
One of the reasons cars hold value better is often reliability and lower maintenance costs. Consider that a double advantage for vehicles that hold value well. As you compare models, check the total cost of ownership reports on Edmunds and KBB.
If you plan to own a car for ten years, it usually costs less to buy a more affordable new model than a “fancier” used model at the same price. Again, check the total cost of ownership calculation.
Beware of add-on features that cost extra for some models, but which come standard for other comparable ones. Or, just skip them entirely, as more complex systems add more potential failure points later.
Finally, don’t forget insurance and fuel costs. They add to your total cost to own and operate the car, but they can vary widely between models.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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