Before deciding to take out a car loan, it is important to know the cost to integrate this expense into the household budget. Basically, it is to forecast the total cost of the car loan, information that is provided to you during your online simulations to serve as a reference. But what does the total cost of a car loan really represent? What are the criteria to take into account?
The basic calculation of a car loan
To know the cost of your car loan, enter essential data which are the amount you are going to borrow, the interest rate applied by the bank, the repayment frequency (ie monthly payments for a car loan) and the total duration of the loan.
From this information, you will be able to create a repayment schedule, better known as the “amortization schedule”, which must be provided with the car loan offer. By consulting this document, you will know the details concerning each due date, as well as the share of the principal, the interests, the insurance premium and the principal remaining due after a monthly payment.
Of course, this approach is only valid for the car loan with fixed interest rate, because a variable rate does not allow to make a amortization table with the interest rate supposed to evolve according to the market, the ideal being to do a car loan simulation to find the most attractive offer on the market.
Car loan: what about the overall cost?
Under a car loan, the overall cost of the loan is the difference between the total monthly payments and that of the loan. This figure is also provided to you at the start of the process for granting credit so that you can better predict the deadlines in your monthly budget.
Indeed, the monthly payments of a car loan are constrained expenses and if you do not have the necessary budget, it is better to use another approach. For example, you can reduce the cost of a monthly payment to include it in your monthly expenses, for a higher interest rate and a longer repayment term.
But you can trust it if your goal is to get a larger sum to borrow, while respecting a certain limit in terms of financial burden.
The annual effective global rate of financing
Among the information provided to you during the simulation of your car loan, you have the Annual Effective Annual Rate taking into account the debit interest rate and various costs such as insurance costs, application fees, costs annexes (tax stamps, registration with the bank, etc.).
This APR is a universal value that will help you calculate the total cost of your credit and facilitate comparisons among the different offers of car credit. Without forgetting the other selection criteria which are the repayment duration and the amount of each installment.
Finally, remember that a low interest rate does not automatically mean an attractive offer, wait until you see the entire contract to decide to take out this car loan.