How to calculate a car loan

By Nooreen B
Modified on June 6, 2023
How To Calculate a Car Loan

A car loan, also called an auto loan, is a type of loan that helps people finance a vehicle purchase. If you are thinking of taking out a car loan of your own, you may be curious about how you can calculate a potential loan’s payment. Knowing how much you will be paying is extremely important, especially if you are trying to compare multiple offers. Below you will find a step-by-step process for calculating a car loan and more information about these installment loans in general. 

Steps for Calculating a Car Loan On Your Own

Once you have all the information you need, calculating your car loan can be pretty straightforward. Here is what you need to do to figure out your monthly payment:

The First Step: Get Specifics From Your Lender

The first thing you will need to do is get specifics from your lender about loan terms. Ask about interest rates, car loan repayment periods, and the principal amount. They may ask for you to apply for pre-approval before providing this information. The convenient thing about pre-approval for a loan is that you don’t have to go through a hard credit inquiry (one that will impact your credit scores). Most car loans have a fixed interest rate, meaning the monthly payments will stay the same throughout repayment. 

Step Two: Know the Amortized Payment Formula 

The next step is to take the numbers that your potential lender or lenders have provided you and do some math. Because an auto loan is an Amortized loan (a loan that factors varying amounts with each payment, as a person makes their monthly payments), you will need to use a specific formula:

A = P [ r x (1+r)n) / (1+r)n – 1) ]

A = the monthly payment.

P = the principal.

r = the interest rate per month, which equals the annual interest rate divided by 12.

n = the total number of months. 

Step Three: Plug in Your Numbers

Once you know the formula, all you have to do is plug in your specific loan numbers. Below is an example to help you get a better understanding of how to use the formula from above:

Let’s say that your principal amount is 20,000, your interest rate is 5%, and your repayment period is 3 years or 36 months. 

Here is how you would calculate the monthly payment with these numbers:  

  1. The first thing to do is to divide the interest rate by 100 to change it to a decimal and then by 12, which would give you 0.0042—the monthly interest rate for this formula. 
  2. Then plug in the numbers: 

A = 20,000 [ 0.42 x (1 +0.42)36 / (1+ 0.42)36 – 1) ]

A = 20,000 [ (0.00488401629) / (0.1628610213) ]

A = 599.77

As you can see, you will have a monthly car loan payment of approximately $599.77. And so, with three simple steps, you can calculate how much you will have to pay each month. 

Using an Auto Loan Calculator 

If you are not up for doing the math on your own, you can use a car loan calculator online! At CreditNinja, we have an easy-to-use calculator for amortized loans. Simply put in the correct information, hit enter, and let the auto loan payment calculator do the math for you! 

Don’t Forget to Factor in Any Fees

Because car loans involve the purchase of a vehicle, some fees will be associated with the sale. For example, you will have to pay sales tax; that amount will depend on where you live, and you can expect a range between 3% and 7%. 

The vehicle registration and title fees are other costs you should factor in when purchasing a car; expect to pay $100 to $400, depending on your state. 

Another thing to add to your expenses is car insurance. All 50 states require car insurance coverage, and the cost for that may increase when you switch vehicles. Talk to an insurance agent for specifics with your new vehicle beforehand so you know you can afford it. 

And finally, you may have to pay a documentation fee if you work with car dealers.

Factor in Your Down Payment or Any Trade in Value When Calculating Your Principal

You should never borrow more money from a loan than you need, so before requesting an auto loan amount, do not forget to add in any trade-in value or down payment for your new car purchase.

A down payment is an amount you can provide upfront. For cars, it usually is a few thousand dollars, and most experts say to put down at least 20% of the vehicle’s value. While trade-in value is monetary credit you may get if you sell to a car dealership and buy another vehicle from them. Depending on your car, condition, and mileage, you may be getting back hundreds or thousands of dollars; check out its Kelley Blue Book value for an estimate. 

If you have a down payment or trade-in value, make sure you factor that in with the principal amount you are thinking of taking out with your auto loan.

The Importance of Calculating Your Car Loan Payments

Before taking out an auto loan for a new or used car, it is essential to know how much you will be paying monthly. This can help you determine whether the loan is a good fit for your budget. Frequent late payments on a car loan can mean consequences like repossession of the car and a substantial negative impact on your credit score. Additionally, knowing your monthly payments on loan offers can help you compare multiple loans to find the most affordable. 

Other Things You Should Pay Attention to With a New Car Loan

The monthly payment is definitely important, but you should also pay attention to some of the factors that make up those monthly payments, along with a few other things. Here are some details you should look at with your car loan before making your decision:

  1. The Loan Term / Period — How long or short your loan will be will impact how much interest you pay over time and how much you have to pay each month. The longer the loan, the less you will have to pay monthly, but the more interest you will pay over time. While a shorter loan will mean paying more monthly, but less interest over the life of the loan. 
  2. The Interest Rate — Another important variable to consider before picking a loan is the interest rate of the loan offer. Your interest payments will likely be the most expensive cost when borrowing money. You can expect better rates from all lenders if you have a good credit score, while poor credit will mean the opposite. Either way, it will be helpful to compare your options. 
  3. The Financial Institution / Lender The lender or financial institution you are thinking of working with will significantly impact your loan. For example, some lenders are more flexible than others, and if you have trouble making your car payment in the future, the more flexible lender may be more accommodating. And so, before you choose a lender to work with, check out past customer reviews and see if any consumer complaints have been filed with the Better Business Bureau. 

Alternative Options for a Car You Can Use To Make Your Vehicle Purchase

Although car loans are the obvious and most popular choice when financing a car, there are alternative options, some that could mean bypassing borrowing altogether:

Personal Loans

Personal loans are loan options with steady monthly payments and are some of the most versatile loan options available. Along with the versatility, they are available for borrowers from several different credit backgrounds (with the right lender). They can come with a short or long-term repayment plan and can definitely be used to pay for a full or partial car purchase. 

Saving up for a Car

You may want to consider saving overtime for a car, especially if you already have a working vehicle you can use. The more you have saved up, the less you have to borrow. And less debt is always better than adding new loans to your credit reports. If you have to borrow funds, a smaller loan will be easier to repay. 

Credit Cards for Partial Payments

It won’t be a good idea to pay for the total cost of your car on credit cards. Because their interest rates can be pretty high, it’s not a good idea to have a lot of credit card debt. Instead of purchasing your car with credit cards, you may be able to pay some fees involved with the car buying process. These costs include sales tax, vehicle fees, and document fees, etc.

Looking at Cheaper Car Options Which Don’t Require a Loan

Everyone knows that new cars depreciate significantly as soon as they are driven out from a car lot. As a buyer, you can use this to your advantage. Instead of considering a brand new car, look for a gently used one. You may find that you might not have to finance it. Or you can look at vehicles that are generally cheaper than the make and model you originally wanted.

Consider a Trade-in

If you are working with a car dealership, consider a trade-in. A trade-in involves swapping your old vehicle. The dealer will include that trade-in value towards your new car purchase. Depending on your old car, you could be looking at thousands of dollars towards the purchase, sometimes taking out the need for financing. 

What New Car Fees Should You Pay | Edmunds
Amortized Loan Amount Formula | Wall Street Mojo

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