Principal Amount:
amount need to purchase the account
Interest Rate:
the rate lenders will charge for the loan
Term:
the length of time you have to repay the term
Lenders will use an amortization schedule to calculate your monthly payments
Let's say that you want to purchase a new car. The total cost is $20,000.
The auto dealer offers a financing plan for 60 months at 6.75% APR with a low, monthly payment at: $393.67
The total amount of interest and principal paid over the 60-month term at 6.75%:
Total Payments
$23,620
Total Interest Paid
$3,620
Total Principal Paid
$20,000
Your loan repayment plan would look like this:
Month
Starting
Balance
Monthly
Payment
Interest
Prin
1
$20,000.00
$393.67
$112.50
$282.17
2
19,718.83
393.67
110.92
282.75
3
19,436.08
393.67
107.73
284.34
4
19,151.74
393.67
106.12
285.94
57
1,552.78
393.67
8.73
382.78
58
1,167.84
393.67
6.57
384.93
59
780.74
393.67
4.39
387.10
60
391.47
393.67
2.20
389.28
Total:
$23,620
$3,620
$20,000
In
this example:
An amortization schedule is
calculated that shows that the
borrower must pay $393.67 each
month for 60 months in order
to meet the interest obligation
and to pay down the borrowed
amount to $0 over 5 years.
The interest charges for the
first month is calculated as
such:
$20,000 X 6.75% (divided by)
12 months = $112.50
In the first payment, the
borrower pays the lender $112.50
in interest. The remaining amount
of $281.17 will repay the loan
and reduce the borrowed amount
to $19,718.83.
The interest charges for the
second month is calculated as
such:
$19,718.83 X 6.75% (divided
by) 12 months = $110.92
In the second payment, the
borrower pays the lender $110.92
in interest. The remaining amount
of $282.75 will repay the loan
balance and reduce the borrowed
amount to $19,436.08
This will continue all the way
through the 60th payment, where the borrower
pays the lender $2.20 in interest.
The remaining amount of $389.28
will repay the loan balance
and reduce the borrowed amount
to $0. The auto loan obligation has
been paid off.
Financing Your Auto:
Calculating Your Auto Loan Payment
Financing Your Auto:
Dealer or Bank Financing
It makes no difference if you finance your car through a dealer or bank
You will likely get the same rate regardless where you choose to finance.
Your Debt-to-Income Ratio:
calculates the amount of debt that you have compared to the income you make.
Your total debt-to-income ratio should be lower than 36% in order to qualify for the best interest rate. In other words, the total amount of your debt payments (including our mortgage or rent) should not be more than 36% of your total income: calculate your debt-to-income ratio
Understand that the dealer is paid by the lender when they refer an auto loan application
Dealers will provide financing on behalf of the lenders. Dealers will generally work with 2-3 lenders.
When you sit down with dealer financing, they will submit your application to their preferred lenders who in return will send back a repayment term and interest rate.
Understand that the higher the interest rate that the dealer can get, the higher the award that the lender will pay the dealer.
So the dealer will often try to get the rate up in order to maximize their lender fee.
Dealers will often sell you the monthly loan payment instead of the interest rate
Most consumers do not understand rate. They do however understand how much they can afford each month.
So when you sit down with dealer financing, the first question they will ask you is how much you can afford. The dealers will then take your affordability amount, and based on the purchase price of the car, they will present you will 1-2 repayment plans.
The dealers are required by law to give you the interest rate (the APR). But they hope to sell you on the attractive repayment plan instead of a lower interest rate.
And the higher interest rate that the dealer can get, the higher the award is paid to the dealer.
You need to shop interest rates to get the best overall deal
Note that by shopping around and doing your homework, you can get a better interest rate and loan payment.
These are the steps to follow:
start with a high credit score
if your credit score is 720 or above, you can negotiage best interest rate and repayment term.
download this amortization sheet
use this amortization sheet to run repayment scenarios. Try different rates, repayment amounts, etc., to come up with the best financing option.
start the negotiations:
take the quotes that have been given you from your application and ask the dealer to get you a better deal. If they can't, you know that you have best deal.