The Real Cost of a Car Loan

An auto loan costs more than the price of the vehicle itself. Often, people forget to factor in the additional items that can make the real cost of a car loan more than they bargained for. We're here to explain what can drive up loan costs, and how you can help keep one within your budget.

Car Loan Costs

When you look at the sticker on a vehicle window, you're seeing a list of everything that goes into the total cost of the car – except everything else. Window stickers, officially called Monroney labels, only show you the manufacturer's suggested retail price (MSRP) of a vehicle.

The actual cost of a car can be thousands more than the negotiated price once you add in things like sales tax, title and registration fees, and a dealership added documentation (doc) fee. All together, this is called the out-the-door price of a vehicle.

On top of this, you now have to consider the cost of borrowing money. Nearly all loans come with an interest rate, and the lower your credit score, the higher that rate is likely to be. Let's look at what goes into the real cost of an auto loan:

  • The Real Cost of a Car LoanMSRP – This is the price of the car as it comes from the automaker. Your final price depends on things like trim level and additional features that may be dealer-added. Once you settle on a price, your total is called the negotiated selling price.
  • Sales tax – Most states have a vehicle sales tax, but not all of them. The rate varies from state to state.
  • Title fee – The title fee you're charged varies by state. Some states charge a minimal, one-time flat fee for a car title, while others charge a few hundred dollars.
  • Registration fee – This fee also varies by state. Some require a yearly payment, others require registration every few years. Some states base the cost on the cost of your vehicle, while others base it on the weight or age of the car.
  • Destination charge – This is only charged on new vehicles, and is the cost of shipping a car from the factory to the consumer. This fee, listed on the Monroney label, is non-negotiable.
  • Doc fees – When you get an auto loan, the dealership typically takes care of all the filing and paperwork necessary, but at a cost. This is the doc fee, and it can vary from dealer to dealer. Some states place caps on how much a dealership can charge, and these fees may be negotiable.
  • Interest rate – The interest rate you're charged is largely based on your credit, but it can also be impacted by the age of the vehicle, the length of the loan term, the lender, and how much of a down payment you make.

Lower the Cost of Your Auto Loan

Now that you know what goes into the out-the-door cost of a car, and that it costs you to borrow money with an auto loan, let's look at ways you can help make the costs more manageable.

Just because more goes into the real cost of a car loan than you thought, there's no reason you can't have a manageable auto loan payment. If you have poor credit, it's especially important that you build and stick to a budget.

Here are five ways you can make your car loan more affordable:

  1. Don't be a payment shopper. It's a good idea to balance a monthly payment you can afford with a loan term that's as short as possible. If you only focus on getting the lowest possible monthly payment, you may end up with a loan term that lasts six or more years. Doing this only racks up interest charges, making your loan more expensive.
  2. Buy an affordable, reliable vehicle that holds its value. One way to lower the cost of your loan is to opt for a less expensive vehicle. Sure, new is nice, but it's not always necessary. You may often qualify for a larger selection of used and certified pre-owned cars, which could save you thousands of dollars over a similar new model.
  3. Rate shop. When you're financing a vehicle, make sure that you're getting the best deal you can by applying with a few lenders in a two-week time span. Asking for credit in this short time allows for these hard inquiries to only count against your credit score as one. Plus, it gives you a chance to save by choosing the lowest interest rate you qualify for.
  4. Make a large down payment. By making the biggest down payment you can, you're reducing the amount you have to borrow, which lowers your overall cost because it reduces the interest charges. Most lenders, especially subprime lenders that work with bad credit borrowers, require a down payment. If you can't come up with a large amount of cash, you can use a trade-in with equity to help.
  5. Negotiate what you can. Not every fee charged on an auto loan is set in stone. Items like add-ons, warranties, and doc fees are negotiable, and you should get them as low as you can before signing your contract.

Get an Auto Loan at a Local Dealership

Now that you know that the real cost of a car loan is more than the price of the vehicle, you’re more prepared for your next auto loan. If you're looking for a good place to start, turn to us at The Car Connection.

We work with a coast-to-coast dealer network that's teamed up with lenders to help people in many types of credit situations including bad credit, no credit, and even bankruptcy. It doesn't have to be difficult to find a local special finance dealership. Fill out our zero-obligation car loan request form, and we'll get to work for you.


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