Learn How to Compare Car Loan Rates
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Compare Car Loan Rates

How to Compare Car Loan Rates

Comparing car loan rates is actually quite easy once you know what attributes to look for in a loan.

Car Loan Rate Comparison Criteria

To make your comparison shopping as easy as possible, compare loans on the following criteria:

  • Total up-front costs (charges & fees). These are initial, out-of-pocket fees you'll have to pay upon taking out the loan. Lenders sometimes refer to these up-front costs as origination or processing fees. The important factor here is the total cost to you. To add up the total up-front costs, itemize all of the fees and charges for each quote on car loan rates.

  • APR (annual percentage rate). The APR is designed to reflect the total annual cost of the loan to the borrower. The APR includes the interest rate on the loan in addition to the lender's fees and charges. Your APR will be expressed as a percentage of the loan's principal. Car loan rates and APR's are similar in that the lower they are, the better. Federal legislation mandates that lenders calculate APR's the same way and display the number in bold on all consumer loan agreements. The APR is a much more accurate way to compare the true costs of loans than the interest rates. When you compare APR's, you might discover that low car loan rates sometimes end up costing you more because of fees and charges. A loan with a higher interest rate and a lower APR might be the better choice.

  • Total cost of the car loan. The total cost of the loan reflects all of the monthly payments you will make in addition to the fees and charges you pay. Total cost is a much more valid measure than monthly payments for comparing loans because it takes into account total interest expenses over time and all fees and charges. For example, when you're shopping for car loan rates, you might see a $10,000 loan with a 7% interest rate amortized over a 60-month period. This loan will have a lower monthly payment than the same loan amortized over a 36-month period, but the 36-month loan will have a lower total cost because you pay less in interest. Always avoid longer-term loans because cars depreciate so quickly during the first 1-2 years of ownership. You might end up upside-down in your loan with a longer term because you will owe more on the car than it's worth.

  • Prepayment privileges. If you find yourself able to pay off your car loan faster than anticipated with additional monthly payments, you could save a bundle on interest. However, some car loan rates limit your prepayment privileges, or how many extra payments you can make per year. If your loan doesn't allow additional payments, try to negotiate prepayment privileges with your lender.

  • Prepayment penalties. When you are comparing car loan rates, be sure to factor in any prepayment penalties. Some lenders will charge you a hefty fee if you pay your car loan off early. The best loan, obviously, is the one with the lowest prepayment penalty or with no penalty at all.

Get your car loan rate questions answered on our FAQ page.

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