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THE APR The APR is a percentage of the loan principal that you
must pay to your credit union, bank, or other lender every year to finance the
purchase of your car. This finance charge includes interest and any fees for
arranging the loan. The charge gets added to the amount you borrow, and you repay
the combined total, typically in monthly installments over the course of the term.
For example, if you take a $15,000 auto loan from your credit union with a 7.5%
APR that you repay over four years, you'll owe $362.69 every month. Over a year,
those payments would total $4,352.28, and over the life of the loan, $17,409.12.
That means it costs you $2,409.12 to borrow the money to buy the car.
When you're looking for a loan, you want the lowest APR you can find for the
term you choose. The higher the rate, the more borrowing will cost you.
Most APRs you'll be offered will be in the same ballpark. That's because
the cost of borrowing at any given time depends on what lenders themselves
have to pay for the money they're using to make loans. But credit unions,
which aren't trying to make a profit, or the financing arms of car companies
that want to promote the sale of their cars, might offer lower rates.
 You may even find that rates from car companies are as low as 0% —
especially if sales have been sluggish and they're trying to entice buyers.
Obviously it can be a good deal. But be careful to read the fine print about
the conditions that may apply. If you miss a payment or don't pay within
the allotted time, you could find yourself owing interest on the total
amount of the loan even if you have already paid most of what is due.
THE TERMThe term of your loan also affects what it costs you
to borrow. A shorter term means higher monthly payments but a lower total
cost. On the flip side, a longer term means smaller monthly payments and
a higher total cost.
For example, the same $15,000 loan at 7.5% APR that cost $362.69 a month
for a four-year term would cost $466.60 a month for a three-year term
and $300.57 for a five-year term. But the three-year term would cost you
just $1,797.60 in finance charges — $611.52 less than the four-year loan.
And the loan with the five-year term would cost $3,034.20, or $625.08 more
than the one with the four-year term.
Sometimes, though, you still might choose the longer term, and the higher cost,
if you can manage the smaller payment more easily than the larger one. After
all, it can be worth it to pay a little more over time if you're worried
that you might default on your payments.
But keep in mind that a car might start to cost you money for upkeep after it
reaches a certain age or you've driven it long distances. You don't want to
choose so long a term for your car loan that you'll still be paying it off
while also having to pay for major repairs.
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When you're shopping for a car loan, remember that what it costs you to borrow
depends on three things:
