How to Use a Car Loan Formula

Buying a car involves more than picking it out and taking it for a test drive. Most people need a car loan, too. In order to stay happy with your new car, get a loan that fits your needs for the amount and number of monthly payments. Use a car loan formula to get the car loan right for you.

Difficulty: Moderately Challenging

Instructions

1. Figure out what you can afford before hitting the car lot in order to avoid buyer's remorse. Look at a monthly payment you can live with. Calculate 36-, 48- and 60-month loans with different interest rates.

2. Remember that a car loan isn't simply the car price divided by the number of months in the loan period; you must also include interest rates, which vary. Obviously, the lower the interest rate, the better the monthly payments.

3. Add all options and licensing fees to the price of the car. This includes a destination fee that can range from $300 to $600. Multiply this by your state tax percentage. For example, if your state charges an eight percent sales tax, then you would multiply your costs by .08 and add that amount to your costs for a final total for a loan needed to buy your car.

4. Take the loan amount and compute your monthly payment with an amortization table or online amortization calculator that allows you to key in the loan amount, interest rate and number of payments to determine a monthly payment.

5. Enter the following formula to an Excel spreadsheet to get your answer quickly: "=PMT(r,n,P)."

Tips & Warnings

• Remember to subtract any down payment or trade-in value from the price of the car before doing your calculations.
• An amortization schedule can also show you how much principal and interest you pay each month.
• Don't forget that you'll be making a payment to your state Department of Motor Vehicles for registration and licensing within a month of buying your car.

Resources

• Check the auto loan calculator at Cars.com.