How Are Car Loan Payments Calculated?

Total Amount of the Loan

Determine the total amount you will have to borrow. The cost of the car is not limited to the sticker price. Add to the sticker price any extended warranties, taxes, titles or registration fees for your new car. From this amount, deduct the amount of your trade-in if you have one and the amount of your down payment. This is the total amount you will have to borrow.

Calculating the Monthly Payment

Use the following formula to determine the monthly payment of the loan, where R is the interest rate per month, t is how long in months the loan term is and P is the principal of the loan. To find the interest rate per month, divide the annual interest rate by 12:

Monthly Payment = ( R + R / ( ( 1+R )^ t - 1)) * P

For example, if you borrowed $10,000 for 72 months at 6% percent, your monthly payment would be $165.73.

Upside-Down Loans

One of the dangers of taking out a car loan with a low down payment and a long repayment schedule is the car will depreciate faster than you will pay off the loan. Because the initial payments on a loan are mostly paying interest, the principal does not decrease much. A car loses a lot of its value in the first few years. To avoid this, do not take out a loan on a vehicle for longer than you plan to own the car. For example, if you plan to own the car for 5 years, do not take out a loan that will take 10 years to repay.

References

• Loan Payment Formula
• Upside-Down Car Loans

Resources

• Auto Loan Calculator