First Car Guide for First Time Car Buyers

Calculating Car Loan Payments

Car payment calculations require a rather complex business math formula that most people are not able, or willing, to take on.

It's much easier to use a hand-held business calculator, such as the HP 12c or HP 17b, or use an online auto loan calculator.

To use a loan calculator, you must know the amount being financed, the number of months you want to finance, the interest rate. You'll also need to know the down payment amount, if any, and the value of your trade-in vehicle, if any. You need to know the sales tax rate that applies to your home location, not where you buy your car.

The way in which car loan payments are calculated sets a fixed monthly payment figure that includes two parts: a part that repays some of the principle ( the amount you borrow), and a second part that pays interest on your outstanding balance.

Since your loan balance decreases a little each month, the amount of interest decreases and the amount going to repay principle increases.

This means that in the early months of your loan, you pay a lot of interest and less principle. As you move toward the end of your loan, you pay very little interest and a lot of principle.

Each month's payments is made up of a different amount of principle and interest. No two month's payments are exactly the same in the amounts of the two parts, although the sum is always the same (except for possibly the last payment which is usually less).

One possible problem with the way that car loans are structured is that the small amount of principle being paid in the beginning of the loan term  may not pay your principle down as fast as the value of your vehicle depreciates.

This means you may be "upside down" — you owe more on your loan than your car is worth, which can be a problem if you decide to sell or trade before your loan is paid off, or nearly paid off.

If you decide on a long-term loan (more than 48 months), or have a high interest rate, or make little or no down payment, or roll over negative equity from a previous car loan, you are almost assured of being upside down for most of your loan term.

Some banks and loan companies allow you to make extra payments or pay more each month toward principle, which ends your loan sooner, lowers total finance costs, and reduces the chance of being upside down. Contact your bank or loan company to make arrangements.