To compare vehicle loans, make a chart with the following eight columns: names and phone numbers of lenders, annual percentage rate, three-year term, four-year term, five-year term, six-year term, total interest charges, and other finance charges for each loan. Call or check Web sites for at least three lenders such as a credit union, bank, and savings and loan association to fill in your columns.
Here is an example: Lender A will offer you a $15,000 loan at 8.44 percent for three years (36 months), four years (48 months), and five years (60 months). The monthly payments for the three-year loan would be $470 each month and cost you an additional $1,913 in interest. The monthly payments for the four-year loan would be $367 per month, and you would pay $2,603 in interest. The monthly payment for the five-year loan would be $305, and the total interest for this loan would be $3,310. If you could find a 7.5 percent loan for three years, your monthly payments would be $464. Your total interest would be $1,693, saving you $220, which is a pretty good return on your time spent comparison shopping.
Home equity loans may also be a good way to finance your purchase. The primary advantage of using a home equity loan is that you will be able to deduct the interest charges on your tax return (if you itemize deductions). The major disadvantages are that you are putting your home in jeopardy if you can't make your car payments, and you will be charged extra expenses such as a home appraisal, title insurance, filing fees, and an origination fee to establish a home equity loan. Dealerships may have special financing packages. Don't hesitate to use this source of funding, but you want to be prepared and do your homework before you sign the paperwork on your new vehicle. The best financial choice is the shortest loan with the lowest interest rate and lowest extra finance charges. In our example, you could save $1,397 from a three-year loan compared to a five-year loan.
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