Things to Know About Car Loans

Several factors affect how much interest you pay on a car loan.

Several factors affect how much interest you pay on a car loan.

Buying a car is probably one of the most important purchases you will ever make. If you're buying a new car or an expensive model used car, you will likely need to take out a loan to purchase your wheels. Several factors affect the terms of your car loan or if you qualify for financing at all.

How Much Principal Is Paid Off on a Car Loan?

To calculate your principal, subtract your down payment from the negotiated price for the car. Divide the annual interest rate by 1200 to determine the monthly interest rate. Multiply the principal amount by the monthly interest. Deduct the result from your monthly payment. The result is an approximation of how much you pay each month toward the principal. However, more of your payment goes towards interest at the beginning of the loan. If you want to pay off your loan more quickly, make larger payments but specify to the lender that the extra money should go toward your principal balance.

Does Negative Equity Affect a New Car Loan?

You've probably seen commercials or ads where dealers promise to pay off your car note as part of your trade in for a new or used car from their dealerships. That may seem like a sweet deal, but the fine print often reveals a different story. Many dealers will add the amount that you still owe on your old car to your new loan or deduct the amount that you still owe from your down payment. As a result, your monthly payment on your new car is higher than it would have been if you didn't have negative equity on your trade-in.

How Does Your Credit Score Affect Car Loan Interest?

You may have heard that many car dealers divide potential buyers into "tiers" where loans are concerned. Buyers in the top tiers get the best interest rates, while those in the lower tiers pay higher interest rates or may not be approved for a car loan at all. Car loan tiers correspond roughly with FICO credit scores. According to Edmunds.com, on average, FICO scores above 720 fall into the top tier for auto loans, and scores between 690 and 720 fall into the second tier. These two tiers are considered superprime and prime tiers and receive the best interest rates. FICO scores between 660 and 689 fall into the third tier; scores ranging from 620 to 659 fall into the fourth tier; scores between 590 and 619 fall into the fifth tier; and FICO scores between 500 and 589 fall into the seventh tier.

Does Unemployment Count as Creditable Income for a Car Loan?

If you've lost your job, and unemployment benefits account for the bulk of your income, you may have trouble qualifying for a loan to buy a new set of wheels. That's because car lenders view unemployment benefits as temporary income, which does not qualify as creditable income for a loan. However, if you can supplement your unemployment benefits with income from a spouse or some other source, you may be able to qualify for a car loan.

Can You Get a Title Loan If You're Still Paying on the Car?

A car title loan is much like taking your car to a pawnbroker. If you fail to pay the car title loan, the lender takes your car. As a result, most car title lenders require you to have your car paid off before they give you a loan. However, some car title lenders will pay off your loan if you have only a few payments left and add that amount to what you owe on the title loan. The company that issues the car title loan becomes your lender, but at interest rates that are much higher than you owed to the dealer or the bank that gave you the original car loan.

About the Author

Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.

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