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If you’re buying a car, it’s important to understand all the costs involved — including the finance charges — to make sure you’re getting the best deal. Finance charges on auto loans are the total cost of borrowing, including interest, fees, and any additional costs imposed by the lender over the life of the loan. Read on to learn more on auto loan finance charges, how to calculate what you might pay, and ways to help minimize the cost.
What Are Finance Charges on Auto Loans?
A finance charge refers to an amount you pay to borrow money. In the case of an auto loan, a finance charge is what you pay to borrow money to purchase the car.Finance charges include interest and other types of fees that lenders impose. For example, the lender might charge a paperwork fee or an origination fee, or they might simply combine those types of fees and call it a finance charge. The charges might be separate from the interest on the loan, or they might be rolled into the cost of the loan. It largely depends on the lender and the terms of the loan.
Average Finance Charges for Auto Loans
The primary finance charge for most auto loans is interest. The interest you’ll be charged will generally be based on two factors:
Credit score: Those with higher credit scores often receive the lowest interest rates.
New or used car: Lenders impose higher interest rates on loans for used cars than they do on loans for new cars.
For those with the highest credit scores, a new car loan has an average interest rate of 6.73%, and a used car loan has an average interest rate of 11.91%. But for those with the lowest credit scores, the average rate for a new car loan is 15.62% and for a used car loan is 21.57%. It’s important to note that you won’t know your actual rate until you apply for a car loan, but this will give you a general idea.Recommended: Guide to Car Loan Interest Rates
Calculating Finance Charges on a Car Loan
It can be helpful to calculate the total finance charges on a car loan to get an idea of what you might have to pay. There’s a simple formula you can use to do this. First, gather all the information about the loan, including the loan amount, the APR, the length of the loan in months, and your daily balance. Once you have the information, you can plug it into this finance charge formula:Finance Charge = Loan Amount x APR / Length of Loan in Months x Average Daily BalanceTo calculate the finance charge, multiply the loan amount by the APR. Then, multiply the length of the loan in months by the loan’s average daily balance. Divide the first number by the second. Take that amount and add any additional fees you’re being charged to it. The resulting number is your total finance charge.
Can You Avoid Finance Charges on a Car Loan?
Unless you can pay for a car outright, there’s no way to completely avoid finance charges. However, car manufacturers occasionally offer 0% APR financing as a promotion on specific models. Just be aware that these offers will often be available instead of other discounts you might get. While it’s difficult to avoid a financing charge altogether, there are ways to minimize the costs. First, shop around for the lowest interest rate possible, which can help save you money.Another way to minimize financing charges is to refinance your car loan. When you refinance with a lower APR, you’ll pay less in interest if you get a lower rate or shorten your term. In addition, you can always make extra car payments or pay off your loan early, if possible, in order to minimize the interest charges.
Paying Finance Charges on a Car Loan
Some car loan finance charges are paid at the time of purchase, whereas others are a part of your monthly payment. It depends on your lender, your loan, and the terms of the loan. When you receive your car loan statement, it will spell out the finance charges as well as the principal amount of the loan.
Do You Get Finance Charges if You Are Refinancing a Car Loan?
When you refinance a car loan, you are paying off an existing loan and taking out another. And like all car loans, there is a cost to refinance a car. Some lenders charge fees, such as transaction and transfer fees, for refinancing. However, you may be able to refinance for a lower interest rate and save money in interest overall. Find out what potential fees you might have to pay to see if refinancing at a lower interest rate is worth it for you.
The Takeaway
A finance charge on a car loan is the cost of borrowing money to buy the car. You’ll have to pay financing charges whether you’re taking out a new car loan or refinancing an existing car loan. By understanding what these charges are, how they are calculated, and ways to shop around for the best rate, you may be able to minimize these costs.
Frequently Asked Questions
What are the finance charges on car loans?
What is the average finance charge for an auto loan?
Are there any finance charges on refinanced car loans?
Photo credit: iStock/Nastasic
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
