by Kelly Eargle

Question: It has been about a dozen years since I took my junior high school practical math class. So refresh my memory, please. I see new-car ads that include reference to "APR." How is the Annualized Percentage Rate computed and how does that compare to the simple interest quoted by my credit union? - Dana S.

Answer: Simple interest is computed on the daily unpaid balance of the loan. The APR reflects your interest rate and any additional upfront interest charges and/or fees. For vehicle loans, credit unions seldom add upfront additional interest and/or fees, so your APR is the same as your simple interest.

Question: I just inherited a ski boat. I really, really want to buy a new truck to haul my boat before summer comes. But it looks like the only way I could handle the monthly payments right now is to extend the term of the loan out further from the five-year period I typically borrow. I know I will pay more interest that way over time, but what other downsides are there to extending the term? - George H.

Answer: Today consumers are being offered auto loan periods of up to eight years, something most lenders would not have imagined not too long ago. Yes, a longer loan typically will give you a lower monthly payment. Keep in mind, though, that the period of time the loan is in effect not only impacts how long you will be making payments but also often can increase the interest rate and interest paid over the term of the loan , which is a double-whammy. Also, keep in mind depreciation - what that truck might be worth seven years or so down the road. If you decide to sell it and pay off the loan early, will the car fetch enough dollars to make that payoff? To counter that, perhaps you could make extra payments as you go along in order to shorten the term (assuming the lender allows early payments).

Another thing to think about with a longer-term loan is obtaining GAP (Guaranteed Asset Protection) insurance. This covers the difference between the vehicle's value as stated in the loan or lease agreement and what your auto insurance company would be willing to pay should your truck become stolen or badly damaged before you have finished paying the loan or the lease. GAP is relatively cheap insurance - typically not much more than $300. You often can obtain it through your financer.

Kelly Eargle is an auto financing expert with the Credit Union of Colorado, which has a branch at the Southeast corner of Sheridan and Dartmouth. Email your question to EargleK@cuofco.org.

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