When shopping for an auto loan, there are several items to consider that directly relate to the total cost and general affordability.  Below are at least 3 topics to keep in mind:

Interest Rate

This will have a significant impact on the overall cost of the loan.  The interest rate can vary widely depending upon the type of loan you seek and how well you qualify.

Applicants with a better credit score and lower debt to income ratio normally qualify for a lower interest rate.  However, people with marginal credit scores can still receive competitive interest rates.  Credit worthiness is a strong indicator of the risk to the lender and the ability of the individual to repay the loan.

Often there are special programs offered with interest rates as low as 0%.  However, this type of loan is basically a “teaser” rate with the effective interest “baked” into the loan.

In determining the best interest rate available, you should shop around.  However, keep in mind that if you apply to several places and a credit report is pulled too often, it can negatively impact your credit score.  In many instances you can know the interest rate without actually applying for the loan.

Another factor that influences the interest rate is the amount of equity in the vehicle.  Generally, a lower interest rate should correspond with additional money put down on the car.

Loan Terms

This is the length of the loan.  Typically, for an auto loan, the terms range from 36 to 60 months.  While a longer term can lower the monthly payment, you will end up paying more in interest over the life of the loan.

The amount of interest you pay is determined by the interest rate that applies to the loan.  These two factors are very much intertwined and directly impact the total cost of the loan.

Fees and other details

Some auto loans require fees such as a credit report fee or administrative fee.  Make certain you understand all fees associated with the loan.  You should also check other details of the loan, such as the option to pay the loan off early.  Some loans carry a prepayment penalty, which means that you are charged a fee if you decide you want to close the loan out before the end of the defined term.  In summary, make certain you understand all fees associated with a loan to avoid unexpected costs.