Have you ever wondered how auto loan lenders determine how much your payments will be when you borrow money through a car loan? For a lender to determine your payment amounts, they must know all the information from the car sale. Once they have all the details, they can tell you exactly how much your car payments will be with the loan. When auto loan lenders offer loans, this is how they determine the amount of the payments.
You Need the Total Price
When you buy a car, you will not pay just the sticker price for the car. Instead, you will pay the sticker price, taxes, and fees. If you trade an older car in for the new car purchase, the trade-in value also affects the total price. Therefore, the lender needs to know the total amount you want to finance. They find this out by adding up the purchase price, taxes, and fees. They then subtract the trade-in value and down payment you make. When they complete this calculation, they will have the total principal amount of the loan. The principal amount is the amount you need to finance through the auto loan, and they use this amount to determine your payments.
They Factor In the Interest Rate
The next thing a lender does is factor in the interest rate. The interest rate you get with your car loan depends on your credit and several other factors. Interest rates often vary by the age of a car, a person's financial situation, and the loan duration. The interest rate tells the lender how much interest you must pay for the total loan. You might not end up paying all the interest they figure, but you will not pay more than the amount they figure.
They Factor In the Loan Duration
Finally, an auto loan lender factors in the loan duration, which is in terms of months. The duration tells them how to spread out the loan principal and interest. If you choose a 36-month loan, you will have higher payments than if you chose a 60-month loan. You can even ask the lender to tell you the payment amounts with different durations to find the one that best suits your budget.
Learning how auto loans work and how lenders calculate payments is helpful when buying a car. If you need a car loan to complete your car purchase, talk to a dealership or auto loan lender today.