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Tips On Comparing Auto Loans |
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Pay attention to a couple of key elements and see how the loans are easy to compare. Shopping for auto loans can save you much money. But it may be a bit confusing when you start comparing the offers. Different lenders have different loans and provide different loan features, have different terminology and different fees. And the best auto loan doesn't mean the lowest monthly payment.
But you can make auto loan comparison a lot easier if you follow some guidelines. First of all, pay attention only to a few key elements and compare the loans from that perspective. This will help you find the loan with the best aspects a lot faster.
Here are some of the elements you should consider:
Up-front fees and charges. Different lenders may use different jargon for these (like origination fees or processing fees), but what really matters is the total cost you are paying. Just add up the fees and charges for each loan, and you'll see how it's easier to compare them from that perspective.
The annual percentage rate (APR). This is the interest rate on the loan combined with all lender fees and charges, and is simply the true annual cost of the loan. APR is expressed as a percentage of the loan principal, and rule of thumb here is the lower the APR, the better is the loan.
The federal Truth in Lending Act imposes the lenders to calculate APR using the same methods and to disclose it in every consumer loan agreement. It’s a much more relevant way of comparing two loans, and gives you more information than the interest rate alone. When using APRs for comparison, you may see that a low-interest loan with higher fees is actually more costly than a loan with a higher interest rate and low additional charges.
The total cost of the loan, is generally the sum of all the monthly payments during the loan period plus all fees and charges. This element provides a better picture when comparing loans, because it sums up all the fees and charges over time. A $10,000 loan at 6.5 percent interest for a period of 60 months will have a lower monthly payment than the same loan at the same rate for a period 36 months. But the total cost of the first loan will be higher, because the interest you will pay will be bigger.
It is recommended to use short- and mid-term auto loans. In general, a car depreciates very quickly and will lose in cost considerably during the first tow years you own it. So in case of a long-term auto loan you may end up owing more on your loan than the actual resale price of the car.
Prepayment privileges. Some lenders offer interest discounts in case you payout your auto loan faster than anticipated. See what prepayment privileges you get with different loans and compare the number of extra payments you’re allowed per year. If the loan you're offered doesn't have such privileges, see if you can negotiate them.
Early-discharge penalties. Many lenders impose a penalty in case you pay off your loan before the actual maturity date. Some won't allow you to do so, others will make you pay a penalty consisting of three monthly interest payments. The rule here is to have the lowest or no penalty.
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