In short, there are basically two car payment options: pay in full or finance over time. If you finance your vehicle, the total cost of payment for the car increases. This is because you are also paying for the cost of “credit” which includes interest and other auto loan costs. However, the full cost is spread out over a specified period of time. It is important to weigh the pros and cons of paying in full or financing over time when making a purchase decision.
When deciding on your car payment options, you’ll also have to take into consideration how much you can put down up-front, the length of the car loan, your monthly payment, and the annual percentage rate of the auto loan. Also, keep in mind that the annual percentage rate is generally higher and loan periods generally shorter on used car loans as opposed to new car loans. The following are important aspects of the auto loan agreement that you should fully understand before you sign any documents:
- The finance charge, which is the specific dollar amount the car loan will cost you.
- The number and amount of loan payments (loan calculators can greatly help here).
- The annual percentage rate (APR), which is a measure of the cost of credit.
- The exact price of the car you are paying for.
- The specific amount you are financing the vehicle for.
- The total sales price, which is the sum of the monthly payments including the down payment.
If you agree to finance a vehicle that carries a high annual percentage rate, you may be taking on a pretty sizeable risk. The risk occurs if you decide to sell the car before the loan expires. The amount you receive from the sale may be far less than the amount you need to pay off the car loan. In addition, if the car is repossessed or declared “totaled” in the event of an accident, you may still be obligated to pay a considerable amount to repay the auto loan even after the insurance payment has been deducted. Finally, if you are working with a tight budget, it might be wise to consider paying cash for a less expensive car or financing for a lesser amount with a sizeable down payment.
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