What Makes Up Your Loan Payment

Common Terms

Lenders and auto dealers have their own lingo when talking about loans. It’s helpful to familiarize yourself with some of these terms:

  • Fees: Dealers can charge a documentation fee of $200 or more for preparing and filing the sales contract and other paperwork. Some states have limits on how much a dealer can charge for this service.
  • Rates: The interest rate refers to the annual cost of the loan to the borrower (not including fees). The higher the interest rate, the higher your monthly payments, and the more you’ll pay over the life of the loan. Annual percentage rate, or APR, is the total cost of borrowing, expressed in a single percentage rate. It includes fees and interest, and is intended to give you more information about what you’re paying for the loan. 
  • Length of loan (loan term): Typical auto loan terms range anywhere from 12 months to 60 months or more. The length of your loan affects the amount you pay each month and how long you have to pay it. If you take out a longer-term loan, your monthly payment may be low, but you’ll pay more in interest over the life of the loan.

Annual Percentage Rates

Annual percentage rate or APR, is the amount of interest you pay on your loan. When you borrow a set amount for a certain amount of time, a lower APR means you’ll pay less in interest. This rate is often affected by your credit history, as well as the length of the loan or loan term. Over the life of your loan, a small difference in APR can add up.

Here is an example of how different APRs can affect a $10,000 auto loan with a term of 48 months:  

Details 3% APR 7% APR
Loan amount $10,000 $10,000
Monthly payment $221.34 $239.46
Total paid over life of loan $10,624.32 $11,494.08
Total interest paid over life of loan $624.32 $1,494.08

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