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Paying cash for groceries at the store is an everyday thing, but the same can quite get said for an individual who goes shopping for cars only to pay up using stacks of cash! People are different, but you’ve probably come across such a person in life. Ordinarily, most individual shoppers prefer to finance their car purchases with the help of a dealership program, a bank loan, or through the services offered by credit unions. Whatever route they choose to take, one thing is pretty clear, and that’s the fact that they all have to make monthly payments. Paying up everything down to the last cent at once is good for you because these monthly payments are going to cost you more than what you were previously supposed to pay.

Any loan constitutes of a principal amount, and the interest. The purchase price of the car without the inclusion of the down payment is what we call the principal amount. Once you decide to contact a lender to finance your purchase, then this is the actual amount you are borrowing. For instance, if your dream car is 46000 dollars and the down payment is 6000 dollars, then your loan’s principal amount is 40000 dollars.

In life everything is a quid pro quo situation - you scratch my back I scratch yours! Therefore, it’s only fair for the lender to want something small in return for helping you out. Subsequently, a little cash gets added on top of the principal amount, and that’s what we refer to as the interest earned. The interest is the cost of the risk the lender took when he or she offered you the 40000-dollar loan.

From all that, we introduce the Annual Percentage Rate (APR) concept which influences the amount of loan you receive based on the payback period, credit history of an individual, and current rates. At the dealership, when buying a new car, be attentive to what the salesperson offers as add-ons. If you’re not keen enough, a lot will get rolled into your monthly payments, hence making it significantly higher than previously anticipated. Examples of such add-ons include a service contract, GAP insurance, theft protection, extended warranty, life and disability insurance. You ought to be aware of the offerings that apply to your situation before going into the dealership. By not doing so, you end up paying more for services you don’t require. Like many other people, you now find yourself asking, “What should you expect from the Annual Percentage Rate?”

Your car loan’s annual percentage rate will greatly vary from that of the next individual due to three essential core factors that include:

  • The payment period of the loan
  • An individuals’ credit score together with the credit history
  • The type of vehicle on purchase

If you have a better credit score and the loan awarded is for a short period, then the rate will work in your favor. Something else worth noting is that loans offered for new cars come with friendly interest rates as opposed to those provided to finance second-hand vehicles. Even though it never plays a crucial role, your place of residence can contribute in deciding your interest rate level.

On average, if you take a look at all financing sources, you find out that the annual percentage rate on a new car loan for a person with excellent credit is approximately 5%, and that of a used car is just over 5%. An individual with credit scores above 720 can end up paying less than 1600 dollars in financing charges over a period of 5 years, on a 20000-dollar new car loan. The deal even sweetens when you decide to acquire the new car direct from the manufacturer because you realize the rate of the new car decreases even more from what’s already on the market.

With the help of information gathered from your credit cards and mortgages, reporting agencies get mandated to compile different individual’s credit histories. These firms have formulated a way of rating your credit history on a 300-850 scale known as the FICO score. If your number is high enough, you get a lower car loan interest. Unfortunately, although those with poor credit scores still qualify for loans, they do so at a higher annual percentage rate.

We have people who choose to make slightly higher monthly payments, and this move decreases your annual percentage rate by half a point. Even though this might not seem as much, it might save you in the long run because instead of covering all the years, you will settle the loan after fewer years. You need to be patient and exercise intelligence when going for a loan and an annual percentage rate that’s friendly to your bank account.

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