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Car loans: the real cost
How the interest rate and loan length change what a car really costs.
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Most people borrow to buy a car. A car loan has three parts: how much you borrow, the interest rate (the APR) and the loan term, how many months you have to pay it back.
A longer term lowers the monthly payment, which feels good, but you pay interest for more months, so the car costs more in total. A higher APR raises both the payment and the total cost. That's one reason your credit score matters: better scores usually get lower rates.
A bigger down payment means you borrow less, so you pay less interest.
All the examples below borrow $20,000.
Words to know
Write what each word means in your own words.
- APR
- Loan term
- Down payment
- Credit score
Questions
- Fill in the total paid and the interest for each loan on $20,000. Total paid = monthly payment × months. Interest = total paid − $20,000.
APR and term Monthly payment Total paid Interest 6% for 60 months $386.66 6% for 72 months $331.46 9% for 60 months $415.17 - Which loan has the lowest monthly payment? Which costs the least in total?
- How much more interest does the 9% loan cost than the 6% loan, both for 60 months?
- What usually helps you get a lower APR?
- A higher credit score
- A longer loan term
- A more expensive car
- Paying with a debit card
- A dealer says, "I can get your payment down to $300 a month." What two questions should you ask before saying yes?
Answer key: Car loans: the real cost
Words to know
- APR: Annual percentage rate: the yearly cost of borrowing money, shown as a percent. It includes interest and some fees. Many credit cards charge more than 20%.
- Loan term: How long you have to pay back a loan, like 60 months for a car loan.
- Down payment: The part of a big purchase, like a car or home, that you pay up front instead of borrowing.
- Credit score: A number, usually from 300 to 850, that tells lenders how likely you are to pay back what you borrow. Paying bills on time is the biggest factor.
Questions
- 6% for 60 months: total $23,199.60, interest $3,199.60. 6% for 72 months: total $23,865.12, interest $3,865.12. 9% for 60 months: total $24,910.20, interest $4,910.20.
- Lowest payment: 6% for 72 months ($331.46). Lowest total cost: 6% for 60 months ($3,199.60 in interest).
- $4,910.20 − $3,199.60 = $1,710.60.
- A. Lenders offer lower rates to borrowers with stronger credit.
- Answers may include: What's the APR? How many months is the loan? What's the total I'll pay? Has anything been added to the price?
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