Understanding the Finance Charge on a Car Loan

The finance charge on a car loan is the total amount it costs you to borrow the money, including interest and other fees. Finance charges can vary significantly between different lenders.

Luckily, there are steps you can take to keep financing costs down. Read on to find out everything you need to know about the finance charge on a car loan!

What Is a Car Loan Finance Charge?

The car loan finance charge is a few different costs added up to one figure. Lenders often show the finance charge as an annual percentage rate (APR). The APR gives you the true cost of your car loan and may include:

• Interest rate: The amount your lender charges for your auto loan, shown as a percentage of your loan amount or loan principal. 
• Fees: Separate charges such as a loan origination fee or processing fee, registration fee, and documentation fee.
• Taxes: Sales tax for buying your car can be included in your APR or paid separately.

Be sure to let your lender know if you want to pay any of these fees and taxes upfront in cash, instead of rolling all the finance charges on your car loan into your APR. 

How Does a Finance Charge Work?

It's a good idea to understand the factors that can impact your total cost of borrowing so you can find the best car loan possible. The finance charge on a car loan is determined by:  

• Loan amount: The more you borrow, the more it will likely cost you.
• Interest rate: Higher credit scores tend to get much better rates.
• Loan term: Shorter terms usually come with lower rates than longer terms.

Your lender will put these figures into an auto loan calculator, along with any fees and taxes, and come up with your APR. 

Another way to work out your finance charge is to take your monthly payment and multiply it by the number of months in your term, then subtract your loan principal.

How to Keep Financing Costs Low

Haggling for a lower sticker price is only one way to reduce the cost of buying a car. It's just as important to think of ways to lower your total cost of borrowing. 

Follow these tips and tricks to make sure you find the best car loan on offer.

Understand Your Credit Score

The first step is to find out your credit score and explore ways to boost your credit, so you can qualify for lower rates on your car loan. 

If your credit isn't in great shape, consider getting a small secured personal loan or secured credit card. Regular payments will help improve your score so you can qualify for an auto loan.

Borrow From a Credit Union

It may seem convenient to get an auto loan at the dealership where you're buying your car, but this means you miss out on the chance to find the lowest finance charges on your car loan.

• Credit unions can often offer lower rates than other financial institutions because they pass revenue onto their members in the form of low-cost loans.
• Credit unions partner with car buying services to give you a stress-free experience, plus discounts on add-ons like extended warranty and auto insurance. 
• Dealerships may roll extra charges and add-ons into your car loan so that a great sticker price ends up costing you more over the life of the loan. 

• Dealerships might act as a go-between with other institutions and may sell your loan so you end up making payments to a third party. 

Borrow the Right Amount

Think carefully about how much you want to borrow because it will affect your monthly payment as well as the finance charge on your car loan. Consider saving up for a down payment if you want to buy a higher value car. 

Avoid borrowing a high amount over a very long term. Even if the monthly payment seems within your budget, the interest will add up.

Choose the Right Term for You

Your loan term affects your APR and the total cost of borrowing. You might want to choose a term in the middle of the range so your monthly payment is affordable and the finance charge on your car loan isn't too high. 

Next Steps: Understanding Car Loan Terms 

Now that you understand the ins and outs of finance charges, you might be ready to do a deep dive into loan terms. Keep in mind that longer loan terms mean a lower monthly payment, but you'll get a higher APR and pay more total interest. 

On the other hand, short loan terms will reduce your cost of borrowing but may mean you can't afford the monthly payment. Click below for more information on auto loan terms!

How Long Should My Loan Be? [Auto Loan Terms Explained]