Decoding car financing for veterans

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The auto loan journey

Lender

You’ve just found a car you love, but now you need to know how to purchase it. You can get a loan through an auto dealer who works with a lender or directly from a bank or credit union. The lender holds a lien on the car—meaning it can repossess the car if you don’t make payments—until you’ve paid back the loan plus interest.

Check your budget to see how much you can comfortably afford for a monthly car payment. Next, use an online calculator or ask a lender to determine what car price you can afford based on that monthly payment.

Bank of America’s Auto Loan Calculator (Link: https://www.bankofamerica.com/auto-loans/auto-loan-calculator/) can help you estimate your monthly payments.

Tip: Get quotes from different lenders and compare their terms. If two loans have the same terms, the loan with the lower interest rate will cost you less overall.

Down payment

You may need to pay part of the car’s price up front. A down payment reduces the lender’s risk and offsets some of the value a new car will lose the first year you own it. In some cases, a vehicle trade-in may count as a down payment.

10.4% The average car down payment in 2015, as a percentage of the price.

A higher credit score can lessen your required down payment.

Paying more up front can lower your monthly payments and the overall interest you pay.

Down payment           $5,000             $10,000
Monthly payment       $449                $359
Total you pay              $31,953           $31,562
(plus interest)

 

If your down payment is $5,000, your monthly payment is $449 and the total you pay (plus interest) is $31,953. If your down payment is $10,000, your monthly payment is $359 and the total you pay (plus interest) is $31,562.

Based on a five-year, $30,000 loan with a 3% annual percentage rate (APR).

Source: Edmunds

Terms

The term is how long you have to pay back your loan. The average new car loan term is 68 months, or just over five-and-a-half years, according to Experian. 

Stretching the repayment over a longer period will lower your monthly payments, but you pay less total interest with a shorter term.

Total interest
Loan amount
Monthly payment

Loan term
25–36 months
37–60 months
61–72 months

Interest rates

The annual percentage rate, or APR, is the interest rate plus any other fees the lender charges. As a result, the APR may be higher than the interest rate. Typically, the shorter your loan term and the higher your credit score, the lower your interest rate. 

Review today’s auto loan interest rates (Link: https://www.bankofamerica.com/auto-loans/) from Bank of America. 

Depreciation

A new car’s value drops when you drive it off the lot. To avoid going “upside down” on your loan—owing more than the car is worth—try to make the biggest down payment you can manage.

After 3 years, new cars are worth about 40% less than purchase price.

Source: Edmunds, 2015

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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