How Interest Rates work while purchasing a car

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How Interest Rates work while purchasing a car

How Interest Rates work while purchasing a car

If you have been following the car market recently, you will notice that the prices have been skyrocketing continuously over the last few months. There have been no signs of stopping. In mid-2021, the used car price was at around $25,000 and the new car price shot up to an insane $40,000. You’d think that as time passes, the situation would improve. However, what followed was the exact opposite. According to KBB and CarandDriver, the average new car price in November of last year was $46,329, and in December that shot up to $47,077. New year bought nothing new in terms of pricing, and the new car price hovers around $47,100 currently. The reason? Well, of course, it is the dreaded pandemic that has pushed the economy to such a precarious position. This pandemic has caused global supply chain shortages. Shortages of chips that occurred back in 2020 are still at large. This has led to a shortage of not just electronics, but also cars. Every major manufacturer has been hit hard and they are trying to recover but without fruitful results. Also, the manufacturers are to blame, since they decided to build only their higher-profit models. All of these combinations mean that you probably won’t be getting that new Ford Explorer for your family anytime soon at a reasonable price.Shortly after the pandemic subsided a bit, and people were allowed back out on the streets, the demand for new and used cars saw a big boom. However, the chip shortage meant that new cars could not be built to fulfill the demand. As a result, the supply was hurt but the demand only kept rising. If you took a basic economics class, you would know that this could mean only one thing – the prices shooting up. That is exactly what happened. Also, it is not going to stop anytime soon, it seems. Earlier predictions stated that the prices might be coming down all collapsed. However, the prices kept rising. At this rate, it won’t be uncommon if we see prices on an average of $50,000. Let’s say you want to go out and buy a car. Let’s say you need a new car no matter what. Of course, it is not possible to pay all of it in cash, that would be ridiculous. What do you do? You do what every American does, turn to auto loans. Auto loans are extremely common in the United States. Virtually everyone who buys a new car applies for an auto loan. However, just as buying a car without researching about it can be costly, getting an auto loan without fully understanding it can also be costly.Of course, with such high current prices, most people would have no option but to turn to auto loans to secure their shiny vehicle and bring it home. There are three major things you should know before you go out and get a loan:

  • The interest rate on auto loans has no fixed limit. It can and will change almost every single day. You must know that these things have no fixed values. If you go inside a showroom and ask for a loan, you might not get the best deal that you are hoping for. Instead, if you go and get a pre-approval for a loan from a bank or a credit union, that might help you more. What you can do is check the current auto loan and their rates. You also would want to know about the market, research about it and ask others if possible. Once you are informed, you can decide what a good auto loan is.
  • You would have to pay in simple interest, and not compound. Our friends who have a slight idea about finances might be very glad to know about this. If you don’t know the difference, then let us inform you. Simple interest is when you have to pay back the total amount you owe, plus a small percentage of that total amount. Compound interest, on the other hand, is when you have to pay interest on the interest. That is just as bad as it sounds.
  • Car loans are amortized. You pay the interest in small amounts with each of your monthly installments so that you won’t have to pay the entire interest amount at once. Also, you must know that your car will depreciate very soon, as that’s what generally happens with cars. Once you buy a car, it will depreciate a lot over time. Some do more, some do less. But they all depreciate.

So, how an auto loan works? First comes a down payment on the total price of the car. If the total price of the car is $50,000; and the down payment is 10%, that means you would have to pay $5,000 upfront. The amount remaining is $45,000. Now, if the interest is 5% over 5 years, then the interest would be calculated on the $45,000. After the payment is over, you can add back the down payment that you had to pay at the beginning and that would be the total amount you paid to own your car. However, one thing to note here is that you must try to pay back the amount as soon as possible. If you take a loan of 7 to 8 years, that would significantly add more interest and make the total value go much higher than the value you would generally pay if you had the loan for 5 years. However, one advantage is the fact that you would have to pay less per month. But the total cost would rise over time. We know that these topics can be a little tough to wrap your head around, especially if you are not into economics and finance. However, you must be aware of these basic pointers before you go ahead and get an auto loan. What you could simply do is, go to the internet and look for an auto loan calculator. These are handy tools that will allow you to calculate the interest, along with everything else that you need to know. Make sure to check one out and if you would be able to afford it before you commit to an auto loan.