Car loan rate basics. A quick primer on how car loans work from Autoloan.com

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Car Loan Basics

Such as APR versus interest rate

The five elements covered below are the basic parts of an auto loan. Understanding them and how they relate to each other will help you shop effectively for the best possible car loan rate.

Annual Percentage Rate (APR) The Annual Percentage Rate (APR) is a yearly rate of interest that includes all of the fees and expenses paid to acquire the loan. Federal law requires lenders to disclose the APR. The APR is essentially the ONLY rate you will need to compare one loan (of the same length) with another, because it includes all of the costs associated with acquiring the loan.

Down payment The down payment is the total amount of
money the borrower puts down towards the purchase of a
vehicle at the time of purchase and origination
of the loan. This does NOT include any credits
for trade equity or rebates and incentives.

NOTE: The down payment is credited to
reduce the final sales price of the vehicle
AFTER it has been adjusted to reflect
taxes, trade inequity or other expenses.

Interest Rate Interest is the annual
rate of return that the lender receives
on the principal of the loan. The
interest rate is relevant t to the lender
while the APR is relevant to the borrower.

 

Loan Term The length of the loan in months. While it is true that the longer the loan term, the lower the monthly payment, increasing loan length to lower the monthly payment should be done with care. Getting the lowest APR is the "Golden Rule" of auto buying, not getting the lowest payment. A longer loan leads to substantially more interest and frequently, a trade inequity if the vehicle is traded in during the first three years.

Principal The amount of the auto loan
    without the interest factored in. In other
        words, the amount you are financing.

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A special note on gap insurance

Depending on the size of your downpayment, you may be asked / required to obtain gap insurance. Considering most people have never heard of it, here's a quick primer.

Suppose you drive your new $10,000 car off the lot and it is stolen the next day. The insurance company will pay for the amount of the car, but to pay off the note, you have to pay off the bank's interest, too. The amount between the loan value and the car vaule is the gap, and the gap insurance would be there to pay it off.