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How to compare one loan to another
The main tip is to itemize each fee and add up to see clearly what the numbers are for each loan.
There is an incredible amount of different loans and loan features. However, what really get’s confusing about shopping for a loan is the different calculations of fees and terminology used for each one.
The easiest way to do it is to dismantle the loan to be able to identify what fees are attributable to each thing. Also, separate the features of each loan and how these increase your monthly payment. This mechanism will allow you to see with clear eyes which auto loans are better than others.
We have categorized some of these steps to make this process go smoother:
Loan origination fees or processing fees: you have to know that the banks or lenders collect a fee, payable at closing, for the processing of the loan.
Annual percentage rate (APR): is the percentage cost of credit on a yearly basis, including the interest rate on the loan, the lenders fees and other charges to estimate the real cost of the loan.
APR was designed by the federal Truth in Lending Act to protect borrowers from getting into loans blind folded. All creditors, including car dealers, must state the cost of their credit in terms of the finance charge and the APR. The APR can show that some loans with high rates are not the most expensive ones; also additional fees and expenses can increase your payment more than a high interest rate. Make sure you ask your lender how their APR is calculated as well. The APR is the most important factor when you are comparing one loan to another.
Final cost of a loan: the best way to compare a loan to another is to sum up all the monthly payments, fees and total interest charges over the length of the loan. When you come up with a total amount at the end of the loan compared to other loans you will see which one is more expensive. Sometimes lower rates with higher fees can be deceiving.
Prepayment privileges: be sure to check that you will not be penalized for paying your loan faster. You can save a lot of money if you increase your monthly payment. Loans vary and some loans put a limit in the amount of extra payments you can do a year, but the more you are able to make the better. If your lender doesn’t offer you this feature check if you can work something out with your lender.
Early-discharge penalties: Something to know is that all loans have a maturity date. The maturity date is the date your loan principal must be repaid in full. Remember that lenders don’t lend you money for free, so some lenders have you pay the total interest remaining until the loans maturity date. Others will probably charge you a set fee, or even a 3 month interest penalty. The loan that will most likely be your best option will have the lowest total cost with no penalty for paying it off early.
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