How car loans work: payments, terms, and deals

How a car loan payment is worked out, why longer loans cost more, and whether to take cash back or a low rate.

A car loan works like most other loans: you borrow a fixed amount and repay it in equal monthly payments over a set number of months. The choices you make at the dealership — the term, the down payment, and which deal you take — can change the total cost by thousands of dollars. What you borrow The amount financed is the price of the car, plus sales tax and fees, minus your down payment and any trade-in. Dealers often talk about the monthly payment first; ask for the amount financed and the APR instead, so you can compare offers fairly. If you still owe money on your trade-in, that balance is often added to the new loan. You then pay interest on your old car as well as the new one. How the term changes the cost Here is $30,000 financed at 6.5% over four common terms: The risk of long loans Going from 48 to 84 months lowers the payment by about $266 but adds about $3,271 in interest. Long loans also raise the risk of owing more than the car is worth, because cars lose value fastest in their first few years. If the car is sold or written off, you may have to pay the difference. A common guideline is the 20/4/10 rule: put at least 20% down, borrow for no more than 4 years, and keep to…