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Guide to Finance Charges on Car Loans

Guide to Finance Charges on Car Loans
Jason Steele
Jason SteeleUpdated October 11, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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. If you’re wondering, what is a finance charge on a car loan?, this guide is for you. Read on to find out what an auto loan finance charge is, 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. So 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, but the term can also be used to describe any 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. First, is the borrower’s credit score. Those with higher credit scores will get lower interest rates. The second factor is whether the car is new or used. Because the value of used cars has depreciated, 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 car loan for a new car has an approximate average APR (annual percentage rate) of 2.40%, and 3.71% for a used car. But for those with the lowest credit scores, the average APR for a new car loan is about 14.76% and the APR for a used car is about 20.99%.  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: 10 Types of Car Loans

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 car loan interest. In addition, you can always make extra car payments or pay off your loan early, if possible, in order to minimize the interest charges. Learn about auto loans explained to get more helpful tips.

Paying Finance Charges on a Car Loan 

Some car loan finance charges are paid at the time of purchase. Others are 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. 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 and drive out of the car lot with a little extra money in your pocket. 

3 Auto Loan Refi Tips

  1. Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right auto refi loan for you.
  2. Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
  3. Generally, the newer your car, the lower the refi interest rate. This is because younger cars typically have a higher value than old or used cars — and the car serves as collateral for the loan.

Photo credit: iStock/Nastasic
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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?

About the Author

Jason Steele

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.
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