The Bottom Line
When applying for a new loan you should be prepared just
as you would be if you wanted a certain colour or engine capacity
on a new car. You will need to know how much you can afford
to repay and you should try to have an idea on interest rates
you can qualify for, your credit score and loan terms or how
long you want to take to pay back. By forgetting to
pay attention to things like interest rate and term of the
loan you will probably end up spending a lot more in the long
run, something that you will no doubt want to avoid!
Shorter Loan Terms Are Less Expensive
The longer the loan term, the reduce the monthly payments -
that said though, the more you'll end up paying for the car
in the long run as the cost of holding the loan increase as
you hold the loan over an extended term. This usually equates
to loans demanding higher rates of interest, but there are,
as always, a some exceptions.
Terms longer than three to four years used to be hard to locate
without paying an exorbitant interest rate, and were likely
to be available only for more expensive vehicles. In recent
years there has tended to be a trend that leans toward longer
term loans for new vehicles: 72-month and even 84-month. The
average new-automobile loan term at finance companies was 61.4
months in 2003 and 62.4 months in 2004.
Below is a chart that shows the monthly re-payments and the
total charges that have been paid for a £7500 loan at
6.9% annual percentage rate (APR), for varying loan terms:
|
Months
|
Monthly Repayments
|
Total
|
Amount of Interest
|
|
12
|
£661.11
|
£7933.32
|
£433.32
|
|
18
|
452.16
|
8138.88
|
638.88
|
|
24
|
347.82
|
8347.68
|
847.68
|
|
30
|
285.33
|
8559.90
|
2059.90
|
|
36
|
243.77
|
8775.72
|
1275.72
|
|
42
|
214.16
|
8993.92
|
1493.92
|
|
48
|
192.03
|
9217.34
|
1717.34
|
|
54
|
174.87
|
9422.98
|
1942.98
|
|
60
|
161.20
|
9672.00
|
2172.00
|
What matters is the amount you repay
The price of your new or used car includes more than the bottom
line you settle upon with the vendor. The true cost is the amount
you will have to pay over the life, which is the interest and
principle taken to finance the car. That total depends upon
the size of your deposit (including trade-in value), the interest
rate, and the number of months taken to pay off the loan.
Try to make the largest deposit you can afford, and look around
for the lowest interest rate. Dodgy dealers or car finance companies
have over charged 10 to 20% of what you should really qualify
for. In the example below, a loan at that rate means you'd be
paying about as much for financing as for the car itself. Don't
forget to re-check the contract to ensure that you actually
do know the rate you are agreeing to pay.
Here's another chart to show monthly payments and total amount
paid for a £7500 loan at various interest rates (APR),
for a 36-month loan term:
|
Interest Rate
|
Monthly Payment
|
Total Owed
|
Portion that is Interest
|
|
8.9%
|
£238.15
|
£8573.40
|
£1073.40
|
|
9.9%
|
241.64
|
8699.40
|
1199.40
|
|
11.0%
|
245.54
|
8839.44
|
1339.44
|
|
12.5%
|
250.9
|
9032.40
|
1532.40
|
|
14.0%
|
256.33
|
9227.88
|
1727.88
|
|
16.0%
|
263.68
|
9492.48
|
1992.48
|
|
18.0%
|
271.14
|
9761.04
|
2261.04
|
|
20.0%
|
278.73
|
10,034.28
|
22534.28
|
|
25.0%
|
298.20
|
10,735.20
|
3235.20
|
|
30.0%
|
318.39
|
11,462.04
|
3962.04
|
Loan Repayment Schedule
The above diagram will assist you when determining the monthly
payments on a given loan value. If, for instance, you want to
have £5000 at 7% interest for three years, multiply £30.88
(the monthly payment for each £1000 of loan amount on
a 3-year loan) by five (£5000 total). Your monthly payment
on that £5000 loan would therefore be £154.40.
Remember, that you'd probably need to have at least £1250
(25 percent of the loan amount) as a deposit. The total of your
deposit and your loan will have to cover the cost of the car
as well as any applicable sales tax and other charges.
|
|
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