It’s “go” time and you’re in the dealership parking lot with soggy palms, a twinge in your stomach, and a pounding pulse you can feel in your temples. You’re breathing more quickly, and your pupils are dilated. I know. As an auto journalist, I’ve been there.
Before signing the paperwork, be sure to get up to speed with our beginner’s guide to car loans, and read on for a look at the basics of how car loans work and the implications of the choices and options you’ll face along the way.
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How to pay for a new car
There are a few different ways to pay for that new car or truck.
Cash is one, though you probably won’t be hauling a gym bag full of twenties into the dealership. So, let’s extend this definition to include any means of paying for the car up front, in full, with your own money. That could be a bank draft, certified cheque or electronic funds transfer (EFT).
You might also lease a car, in which case you’ll agree to make regular payments for a pre-set amount of time—for example, four years. After that time, you either buy the vehicle for its remaining value, or give it back.
Then, there’s financing the vehicle, a.k.a, getting a car loan.
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What is a car loan and how does it work?
When you have a car loan, the loan provider pays for the car up front, and you make payments to them (with interest) that spread the cost of the vehicle out over time.
I recently configured a 2024 Ford F-150 STX online that came in at $59,259 after tax and some pricing incentives. Next, I visited the Payment Estimator. It’s like your favourite pizza joint’s “build your own pizza” app, but with dollars, durations and down payments instead of toppings.
A payment estimator lets you free-play with all available options and terms to see which looks the most enticing to you.
First, choose how long you want to make payments for.
With my new truck, I could choose from 36, 48, 60, 72 and 84 months—that’s three to seven years, if you’re counting. This is called the “loan term” or “loan duration,” and the options you’ll be able to choose from will vary.
If you’ve got a trade-in, here’s where to include it. Estimate its value, and plug it into the calculator to watch those regular payment amounts drop. Same thing happens if you’ve got a down payment, which you can enter as well.
As you switch between loan terms, keep an eye on the on-screen interest rate or APR (annual percentage rate).
The lower the interest rate, the less it costs you to borrow the money. Sometimes, you’ll see 0% financing options, in which case you’re borrowing money for free, with no interest.
You’ll also notice that longer loan terms give you lower payment amounts but often come with higher interest rates, which will cost you more money. Choosing a shorter loan can mean higher regular payment amounts, but ultimately means the car will cost you less.
