What a Car Loan Costs

When shopping for a car, it's usually best to start by shopping for a car loan. When you’re shopping for a car loan, remember that what it costs you to borrow depends on three things:

1. The finance charge, expressed as an annual percentage rate (APR)

2. The term, or length of time the loan lasts

3. The principal, or amount you borrow

 

The APR

The APR (Annual Percentage Rate) is a percentage of the loan principal that you must pay to your credit union, bank, or other lender every year to finance the purchase of your car. This finance charge includes interest and any fees for arranging the loan. The charge gets added to the amount you borrow, and you repay the combined total, typically in monthly installments over the course of the term.

Here's an example: if you took out a $15,000 four year auto loan with a 7.5% APR, the minimum monthly payment would be about $363. If you only made minimum payments throughout the life of the loan, you would pay $2,408 in interest, meaning that you'll be on the hook for $17,408 total (principal + interest).

When you’re looking for a loan, you want the lowest APR you can find for the term you choose. The higher the rate, the more borrowing will cost you.

Most APRs you’ll be offered will be in the same ballpark. That’s because the cost of borrowing at any given time depends on what lenders themselves have to pay for the money they’re using to make loans. Rates can vary, so check with the financing arms of car companies promoting their car sales, or local banks and credit unions to find the lowest one.

The Term

The term of your loan also affects what it costs you to borrow. A shorter term means higher monthly payments (because you have less time to pay it back) but a lower total cost (because you aren't accruing interest for as long). The reverse is also true. A longer term means lower monthly payments but a higher total cost.

For example, consider the differences on that $15,000 loan at a 7.5% APR from the example earlier. The monthly payment for a three-year term would be about $467, a four-year term would be $363, and a five-year term would only be $301. But the interest and finance charges go the opposite direction. It would cost you about $1,798 in interest for the three-year term, $2,409 for the four-year term, and $3,034 for the five-year term.

Sometimes, though, you still might choose the longer term, and the higher cost, if you can manage the smaller payment more easily than the larger one. After all, it can be worth it to pay a little more over time if you’re worried that you might default on your payments.

But keep in mind that a car might start to cost you money for upkeep after it reaches a certain age or you’ve driven it long distances. You don’t want to choose so long a term for your car loan that you’ll still be paying it off while also having to pay for major repairs.

The Principal

It should come as no surprise that the more you borrow, the more borrowing will cost. After all, the finance charge is determined by multiplying the interest rate times the principal. So the more you can reduce your principal, the more affordable borrowing will be.

One thing you can do to cut down your overall cost is to make the largest down payment you can afford so that you reduce your interest costs. Looking for a car that will have a good trade-in value, and trading it in while it’s still in good condition, will help you save money later on as well.

Not-So-Hidden Costs

Keep in mind that you should include the cost of auto insurance when deciding what car to purchase and what monthly payment you can afford. Your insurance premium will vary depending on factors such as where you live, your age, the coverage you choose, and the car you buy. Generally, a newer and more expensive car will be more expensive to insure.

When buying a car, the cost of your loan depends on the APR, loan term, and principal amount. Understanding these factors can help you make smarter decisions, minimize borrowing expenses, and ensure your loan fits your budget. If you have questions about the car buying process, we’re here to help. Please stop by any of our convenient branch locations or give us a call at 248-322-9800 extension 5 to speak with a team member today.

 

© Genisys Credit Union and www.genisyscu.org, 2025. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.

« Return to "Blog"