If you do not have much experience with auto loans, then it can be a bit confusing on what you are actually paying for. Basically, when you take out a loan, the lender is allowing you to use their money and in return, you compensate their services by paying interest on the loan. The length of the loan and the interest rate will overall affect how much interest you will end up paying before the end of the loan term. Keep reading below to learn more!
Which auto loan should I choose?
On your car loan, you will see principal and interest. The principal is the amount that you originally agreed to pay back to the lender and interest is the money that you are paying to the lender for them letting you borrow money.
The interest that you get offered will depend on a variety of factors including your credit score. The higher the interest rate that you have, the more money that you will end up paying back to the lender over the course of your loan. For example, if you have a 5-year loan for $30,287 at 6% interest, you would be paying $585.53 per month. In total you would end up paying $35,131.80 in monthly payments You will always end up paying more money than the amount that you originally took the loan out for.
If they are able, many buyers will try to get a loan for the shortest amount of time that they can afford to avoid paying interest for so many years. Of course, this is all dependent on your budget and what you would like your monthly payments to be.