Please refer to their privacy policy and terms of use for details. Purchasing a car typically means taking out a car loan. When you take out a car loan from a financial institution, you receive your money in a lump sum, then pay it back plus interest over time.
How much you borrow, how much time you take to pay it back and your interest rate all affect the size of your monthly payment. Let's see how adjusting each of the 3 factors can affect your monthly payment:.
Use the Bank of America auto loan calculator to adjust the numbers and see how differences in loan amount, APR and loan term can affect your monthly payment. One of the most important things to understand about how auto loans work is the relationship between the loan term and the interest you pay. A longer loan term can dramatically lower your monthly payment, but it also means you pay more in interest.
But the reality is not that complicated if you do a little bit of preparation to understand your options. So getting to grips with the various types of car finance and the terminology associated with them is useful before you sign on the dotted line, especially as different finance methods will work for drivers with different circumstances.
For example, if you want to ensure low monthly payments, but still want the option to buy the car at the end of the contract or hand it back, Personal Contract Purchase PCP finance could well be the right move for you.
However, if the lowest overall cost to buy the car is your main aim, then Hire Purchase HP could suit you. And if you simply want the lowest monthly payments and don't want the option to own the car, you may want to look into leasing, also known as Personal Contract Hire PCH.
This back-to-basics guide will explain in simple terms how car finance works and the differences between the multiple payment options, so you can be sure which type of finance is best for you. Finance helps to make cars more affordable by spreading the cost across a deposit and a series of monthly payments. This means you can effectively borrow money to pay for a car and then repay this in instalments to the finance company. One form of traditional car finance - known as Hire Purchase HP - works a bit like a bank loan.
This means you can purchase a new or used car without having to save until you have enough cash to buy it outright.
You simply pay the deposit, followed by a series of equal monthly payments and then once you've made the last one of these, the car is yours. You can keep it, sell it or part exchange it for a new model. Meanwhile, another option - Personal Contract Purchase PCP finance - involves a deposit, and then a series of monthly payments that are lower than with an equivalent Hire Purchase setup, so you can afford to get a newer or more desirable model for your monthly budget.
The reason for this, is that the deposit and monthly payments don't cover the full value of the car with PCP as is the case with Hire Purchase , as you have to make a large optional final payment which is set before you sign the deal at the end of the contract if you want to take ownership of the car.
If you don't want to pay this - or can't afford to - you can either hand the car back to the finance company with nothing left to pay provided you've stuck to the pre-agreed mileage limit and kept the car in good condition , or you can refinance the optional final payment with a further series of monthly payments. The amount of interest that you pay increases with the amount you borrow and length of the finance agreement.
So, the more you borrow and the longer the contract, the more interest you'll end up paying. It's also worth being aware that if you intend to buy the car at the end of a PCP finance contract, you're likely to have to pay more in interest than you would with an equivalent Hire Purchase deal. That's because with Hire Purchase you pay off the finance balance quicker, so less interest builds up.
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While it is possible to buy a new or used car with no money down, it's not recommended. According to The Simple Dollar, car dealers are willing to overlook a down payment, but it could end up costing you a huge amount in interest. The down payment is the amount of money you can spend out of pocket on your new vehicle, and the more you can come up with, the better off you will be.
Your loan will be taken out on the amount you need to borrow, minus your down payment. So the more money you have for a down payment, the less your principal will be. The Simple Dollar also tells us that the higher the amount put as a down payment, the lower your overall monthly payment is going to be. Additionally, many people will refinance their car loan soon after getting one. By doing so, you may be able to get a better deal from another lender.
This could potentially save you a lot of money on your monthly bill. If your credit score has improved at all since you initially took out your car loan, refinancing might be beneficial as well.
Understanding what an interest rate is and how it will affect your auto loan is important. The Balance defines an interest rate as the percentage of principal charged by the lender on the money you've borrowed. They tell us that the principal is the total amount that you borrowed. This is how lenders cover their costs and make a profit. Lenders will calculate your interest rate based on a variety of factors which may include:.
You'll also find that interest rates can be determined by either using simple or precomputed calculations.
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