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Buying a car is a big decision, especially if you must stick to a budget. Knowing how to properly calculate your auto loan payments allows you to correctly plan for a new car purchase. While seemingly complex, the amortization loan formula is relatively easy if you know the factors involved. In this article, we’ll first define the auto loan terms you’ll encounter, then show you how to calculate auto loan payments.
Auto Loan Terms
In order to fully understand the amortization formula above, you must have knowledge of some key terms used in the amortization loan process. The terms below provide more information on understanding how you can calculate car loan payments:
- Sale price: The sale price of a car represents the final negotiated price before applying sales tax, trade-in value, rebates and discounts, dealer fees, down payments, and finance fees. The sales price of a car can range far lower or higher than the MSRP depending on the features and other options you select, if any, for the vehicle.
- Sales tax: Each state also requires you to pay a specific amount of sales tax on any car that you purchase. You can calculate this amount by multiplying the car sale price by the appropriate sales tax percentage for your state. In addition to sales tax, you also need to pay the appropriate title fees according to your state’s regulations.
- Trade-in value: If you have a vehicle you wish to trade in when you buy a new vehicle, the value of that trade-in should deduct from the total value of the car in regards to financing. As a rule of thumb, secure the sale price of the vehicle first before talking about any trade-in values.
- Dealer fees: You must also figure any dealer fees into the total price of the vehicle before financing it. Dealer fees include costs for delivering the car from the factory to the dealership, any loan processing fees, and any service and handling fees.
- Rebate and discounts: Car dealerships offer various rebates, incentives, and discounts to try and attract car buyers away from the competition. Some of the more common incentives and rebates include customer cash back, low Annual Percentage Rates (APR), and special lease programs.
- Down payment: A down payment plays a big part in determining exactly how much you end up paying in financing charges for a car. The bigger the down payment, the less you need to have financed, resulting in a lower amount paid overall for the car.
- Principal balance: The principal balance represents the total amount you need financed by a lender after taking into account all fees, taxes, rebates, trade-in value, and down payment. Lenders calculate any finance fees owed by multiplying the principal times the APR.
- Finance fee: The finance fee represents the amount you need to pay the lender for lending you the money for a car. Lenders figure this amount into your payment plan when determining how much you must pay each month. Lenders determine the finance fee by multiplying the amount you owe by the APR.
- Amortization: Amortization represents the process by which you pay off your car loan. In an amortized loan, you start off by paying a majority of the interest you owe up front. As you pay the car loan off, the interest part of each monthly payment becomes less and the principle part becomes more. As you near the end of the loan term, you end up paying off more principal until you pay off the loan.
- Loan term: The length of time for paying off a loan on a car. Typically, the longer the loan term, the more you end up paying for the car in interest payments. Loan term lengths run the gamut from a short, 24-month term, to a longer, 84-month term.
How to Calculate Auto Loan Payments
Once you know all of the facts and figures involved in the auto loan calculating process, you need to figure out how much you owe each month. Keep in mind that you need to calculate each month separately for an amortization loan. To calculate how much you must pay monthly to pay off a car loan, use the following terms plugged into the loan amortization formula:
Auto Loan Calculator Formula: A = P x (r(1+r)n)/((1+r)n - 1)
- The monthly payment = A
- The principal balance = P
- The interest rate per month (Equal to the interest rate divided by 12) = r
- The lease term = n
In order to use this monthly car loan calculator, you must know your monthly car payment, your overall interest rate, the balance you have left on your vehicle, and the term of your lease.
Buying a car represents a big decision that includes determining if a car’s price falls comfortably within your budget. A car payment entails more than just paying back the sale’s price of the car. You need to take into account any taxes, fees, and finance charges a lender might charge you for financing the purchase.