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from The Complete Car Cost Guide

Striking a Balance: Monthly Payments vs. Interest

Determining the cost of a loan is inherently complex. There are a myriad of terms that affect the final cost of the loan. Through it all, a few simple truths exist:

  • The higher the interest rate, the higher the monthly payment.
  • The more you borrow, the higher the monthly payment.
  • The longer the period of your loan, the lower the monthly payment.

In each of these cases, the cost of the loan will be higher.

While the first two points are fairly intuitive, the third point catches a lot of people off guard. A salesperson will frequently attempt to lower your monthly payment, sometimes quite substantially, by stretching out the loan period. But, buyer beware, this will ultimately cost you more. For example, the monthly payment on a $15,000 loan at 8% for five years is $62 less than the same loan over a four-year period. However, the total interest expense is $672 more for the five-year loan versus the four-year loan. This is the cost you pay for the privilege of stretching out your payments for one more year.

1998 The Complete Car Cost Guide™ IntelliChoice® Inc. Campbell, CA