When you obtain a car loan, your monthly payment depends on the length of the loan, your interest rate, and the amount of your loan after your down payment and trade-in, if applicable. Here's how car loan payments are calculated, as well as a calculator that can do the hard part for you.
How Your Car Payment is Calculated (Loan Amortization 101)
There are three major factors that determine your car payment -- the price you're paying for the car after trade-ins, rebates, and your down payment, as well as how many months you'll be making payments, and the interest rate you're given. Once these three numbers are established, the price you agree to pay is amortized over the term of the loan, using the loan's interest rate. Loan amortization is mathematically complex, but the general idea is quite simple. At first, since you're paying interest on the loan's entire balance, more of your monthly payment will be used to pay interest, with the rest applied toward the principal balance. As you begin to pay down the loan, you'll owe less money on which to pay interest, so more of your monthly payment will be applied to the principal. To illustrate this, here are the first few monthly payments on a $30,000 car loan with a 60-month term at 5% interest. The payment is $566 per month, but the interest/principal allocation changes over time.
Calculating Your Car Payment
I teach a college-level class that covers personal finance mathematics, and it includes calculating monthly car payments by hand, a lesson my students are never too fond of. Doing so involves a rather complex formula that's a bit beyond the scope of this article. Fortunately, here's a calculator that can do the hard work for you and calculate your hypothetical car payment. Its even accounts for the value of your trade-in and any cash rebates offered on the car you're looking at:
Many factors go into determining the final loan amount for the purchase of a new or used vehicle. These factors include any manufacturer's rebate, the trade-in value of your old vehicle less any outstanding balance, your down payment, etc. Once the loan amount is determined the interest rate and the term of the loan will be used to estimate your vehicle payment.
A Word to the Wise
These days, longer and longer car loan terms are being offered by dealers in order to sell more expensive cars, but still keep the payments affordable to buyers. The 60-month car loan used to be the longest-term loan available at many dealerships, but 72-month and even 84-month loans are becoming more popular. And many people think that "it's all the same in the end -- I'm just dividing the price of the car over a longer time period."
THIS IS 100% FALSE!
Consider this example. Let's say that you want to buy a car for $25,000, and the dealership offers you two options. The first is a 60-month loan and the other is a 72-month loan, and both are offered with 5% interest rates.
According to the calculator, the 60-month loan's payment would be $472 per month, while the 72-month loan would only cost $403 per month. However, throughout the term of the loan, a borrower taking the 72-month loan would end up paying a total of $696 more in interest. Keep this in mind next time your car salesman tries to sell you on a long-term car loan. Learn more at https://tfciloan.wixsite.com/american-car-loans/post/is-it-possible-to-get-a-loan-with-bad-credit
When you obtain a car loan, your monthly payment depends on the length of the loan, your interest rate, and the amount of your loan after your down payment and trade-in, if applicable. Here's how car loan payments are calculated, as well as a calculator that can do the hard part for you.
