Financing a car is, without a doubt, one of the most widely used options today to be able to buy a new car without having to make large payments all at once. We put ourselves in a situation: you are thinking of buying a car, the second largest investment (according to the car models), after a house. Today, it’s almost impossible to pay for a car in cash, so financing comes into play… and you’re not sure what kind of interest it is, how the amortization table works, etc. Don’t panic! In this post, let’s try to explain the basics you need to know before financing a car.
Nominal Interest Rate
Percentage of interest that the bank will charge for granting you the loan, on the capital outstanding at any given time. It is a fixed interest rate for the entire duration of the loan.
Annual Percentage Rate
This is the total cost you will pay for the loan as an annual percentage.
It is obtained by adding the TIN plus the different fees that the bank may charge you, for example, the opening fee. This is the most important indicator and the one you should really look at, as it reflects the real cost you will have to pay for the loan.
One of the most important things to take into account when requesting information to finance a car is the amortization table: it is the breakdown of the installments and interest during the period in which you are paying the loan. In the case of financing to individuals, the usual practice is that this period is monthly, paying a monthly installment until the repayment term chosen is met.
The repayment term (the number of months you choose to repay the loan) is directly proportional to the amount of interest you will pay.
What other things should you look out for? Fees and related expenses
Opening fee (C.A.)
This is the percentage that is applied when the loan is formalized.
It is important not to confuse it with `Introduction’, which is the initial NOT mandatory contribution you choose, recommended to reduce the amount to be financed and therefore will be `interest-free’.
In addition, there are two types of fees that the bank charges you if you repay the loan (get your money back), in full or in part, ahead of time – why? Because the bank stops earning the interest it would have earned on that loan, so it charges you a percentage of what you pay early. These commissions are two:
Early amortization fee
If you want to repay part of the outstanding principal of the loan, the bank will charge you a 1% or 0.5% commission (if you are in the last 12 months of the loan) on the amount that would remain unpaid at that time.
Total cancellation fee
If you want to repay the loan early, the bank will charge you a 1% or 0.5% commission (if you are in the last 12 months of the loan) on the amount you have left to repay the loan. Tip: Take a good look at the contracts, because many car loans don’t allow you to pay off the loan for the first 36 months and you’ll have to pay back the discount you’ve been given.
Why is this happening? Because the bank is interested in you having a loan and therefore paying some interest (the financial institution will stop earning that amount of interest that you’promised’ when you signed the contract).
Many entities now associate insurance with car loans, which increase the price we pay for our cars. They are usually life insurance or unemployment insurance, which makes you pay a higher fee for these costs, which in many cases you don’t need. As these are costs associated with borrowing, they would form part of the APR and the actual cost of borrowing would, therefore, be very high.