Decoding car financing for veterans
Decoding car financing for veterans
The auto loan journey
A lender loans you money to buy a car. You pay back the loan plus interest over a specific time period. You can finance a car indirectly, through an auto dealer who works with a lender, or directly, from a bank or credit union.
The lender holds a lien on the car until you’ve paid the loan in full. This means the lender legally retains ownership of the car and can repossess it if you don’t make your payments.
Tip: Consider getting multiple quotes and compare terms. Look at more than just the monthly payments: Note the loans’ interest rates—lower rates mean you’ll pay less overall.
You may be required to pay a percentage of the car’s price upfront. The down payment reduces the lender’s risk and offsets some of the value the car will lose the first year you own it. In some cases, a vehicle trade-in may count as a down payment.
The average car down payment in the first half of 2015 was 11%.
The term is how long you have to pay back your loan. If the term is 36 months, for example, you have three years to pay it back. The longer the term, the lower your monthly payments will be, since you’re stretching out the repayment over a longer period of time.
Tip: A longer term also means higher interest costs. Consider choosing the shortest term you can afford.
More than 40% of auto loans have terms between 61 and 72 months.
About 20% of auto loans have terms between 49 and 60 months.
Source: Experian, 2015
The more you pay upfront, the less you’ll have to borrow and pay interest on. It may also lead to lower monthly payments.
Your credit score likely mattered less while you served. Now, a [hyperlink]good credit score[Link: Want to boost your credit score?] is important. Not only will it help you secure a lower rate on a loan, it may also lessen the required down payment.
The annual percentage rate, or APR, is the interest rate plus any other fees the lender charges for the loan. As a result, the APR may be higher than the interest rate.
Typically, the shorter your loan term and the higher your credit score, the lower your interest rate.
After 3 years, a new car is worth about 40% less than purchase price.
Once you drive the car off the lot, it’s worth its wholesale price—rather than the retail price. To avoid going “upside down” on your loan—or owing more than the car is worth—try to place the biggest down payment you can manage.
Assessing how much you could spend on a car
Check your budget to see how much you can comfortably afford to spend on a car payment each month. Next, use an online calculator or ask a lender to determine what price you can afford based on those monthly payments. And remember: The shorter your loan term, the less interest you’ll pay over the life of the loan.
For more information, visit BetterMoneyHabits.com
The material provided on this Website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. Any U.S. federal tax information included in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties. Neither Bank of America nor any of its affiliates provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.