How Are Car Payments Calculated?
Car payments are based on how much you borrow, the interest rate, and the length of the loan.
The more you borrow, the higher the payments. The higher the interest rate, the higher the payments. The longer the loan, the lower the payments.
Unfortunately, the formula for calculating monthly car payments is not a simple one and can’t be easily done by hand or by a simple calculator.
It’s necessary to use an electronic business calculator, or by using an online Car Loan Calculator.
Simply plug in the numbers and get your answer.
You can use it to “work backwards” from a payment you can afford to determine the price of the car you can afford to buy.
Having cash or a trade-in vehicle for a down payment reduces the amount of money you need to borrow, which reduces your monthly payment.
A down payment is not a deposit that you get back at a later date. If you make a deposit to “hold” a car prior to buying, that deposit is applied as a down payment when you buy.
The interest rate on a car loan depends on your credit score. A low credit score means a higher interest rate, which means a higher monthly payment. What’s your FICO credit score? Find out now when you check your credit report for $1 at Experian.com!
If your score is too low, you may not be approved at all for a loan. Having a co-signer with good credit might help.
Getting approved also depends on having a good steady income and no excessive debt.
To get lower car payments, you can do one of the following:
- Purchase a less expensive vehicle
- Increase your cash down payment
- Find a lender with a lower interest rate
- Extend the term (length) of your loan
Just a comment about extending the length of your loan: A longer loan is attractive because it means a lower payment, but it also means a higher total cost due to increased interest charges. It can also mean being “upside down” for most of your loan term, which can make it difficult or impossible to sell or trade your car before the end of the loan.