With the price of the average car now topping $34,000, a car loan is a necessity for most purchasers. Finance companies have devised numerous types of loans to help you purchase a vehicle. To determine the right auto loan for you, you'll have to consider your personal financial situation along with the basic terms of the loan, including its length and interest rate.

Car loan structure
Most car shoppers key in on the amount of their monthly payment. However, the total cost of the loan should be of primary importance when trying to determine the best loan for you. Low monthly payments with long terms - such as 72, 84 or even 96 months - can be very expensive. Many car finance experts suggest that if you can't afford a monthly payment over 60 months you might consider looking at a less expensive vehicle. Look at it this way: a $500 payment over 60 months will cost you $30,000; a $400 payment - or 20 percent less per month - over 84 months carries a total cost of $33,600, or an extra $3,600 in interest.

Simple interest and pre-computed loans
The most basic type of car loan - and the most flexible option for most buyers - is the simple interest loan. Under this type of loan, you only pay interest for the amount of time the loan is outstanding. For example, if you take out a 60-month car loan but pay off the entire balance in just 36 months, you'll only owe 36 months of interest. If you take the full amount of time to pay, you'll owe 60 months of interest. Be careful with pre-computed loans, which can look like simple loans on paper but require you to pay the entire amount of interest on the loan, even if you pay it off early.


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