Comparing Car Loans
This calculator can be used to compare up to five car loans, with durations that range from 36 to 84 months. The calculator needs a total of six inputs by the user, including:
- The car loan amount, which is the amount of money financed as part of a new or used car purchase
- The interest rate charged for loans of various terms including 36, 48, 60, 72 and 84 months
The calculator then provides the user with a total of fifteen data points, appearing as three charts with five bars of information:
- The monthly payment for each of the five loans, with the horizontal (Y-Axis) displaying the number of months over which the payment will take place. Note: Hovering, or tapping the bar in each chart, will display the value of each data point
- The total of all payments made for each of the five loans, which is found by multiplying the number of months over which the payment occurs times the monthly payment
- Finally, the last chart shows us the total of all interest charges, sometimes referred to as the finance charge, for each of the five loan durations. The interest charges on the loan are calculated by taking the total of all payments made and subtracting from it the car loan amount
What’s the value of comparing automobile loans?
In many societies, owning a car provides the driver with readily accessible geographic freedom. While an airplane can supply access to greater distances, a car can transport its owner five miles in less than ten minutes. Unfortunately, this benefit comes at a steep price. Cars themselves are both expensive to own and run. In addition to the upfront payment, buyers will also often borrow money as part of their purchase agreement. Ongoing expenses include fuel, maintenance of wear items (tires, fluids) as well as insurance. Comparing car loans provides insights into both affordability (monthly payments) as well as financing costs (interest payments).
Shorter versus longer term loans
When comparing loans, the decision often comes down to the term, which is how long it will take to pay off the loan. Shorter term loans have a slightly lower risk of non-payment, so these loans will typically charge lower interest rates. Shorter term loans will also have the highest monthly payment since the repayment of the loan’s principal will be spread over relatively few months. Longer term loans will have a greater risk of non-payment, so the interest rate charged on these loans will be relatively high. However, since the repayment of the loan’s principal occurs over a relatively large number of months, payments associated with longer term loans will be relatively low.
The best option for anyone faced with this decision comes down to the balance of affordability versus the magnitude of the loan’s finance charges. Defaulting on a loan is a serious manner, so the monthly payment should be well within the borrower’s financial ability. Stretching the repayment period over needlessly long timeframes to keep the monthly payment as low as possible is not desirable either since the borrower may be paying unjustifiably higher finance charges.