How to Compute Auto Loans
Auto loans most commonly come as three-, four- and five-year loans. The most important feature of an auto loan is the interest rate you are charged, as this will ultimately determine how much borrowing will cost you. The kind of interest rate you get largely depends on your credit history, but always shop around and do not accept just any credit offer given to you by a car dealership under the guise of an affordable monthly payment. Sub-prime auto loans are another open secret of the financial industry.
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Instructions
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Figure out how much you need to borrow. This will determine the principal on your loan. It is always a good idea to have some money to put down toward the purchase of your vehicle. However, it is not impossible to borrow 100 percent of your car's purchase price. Although lending standards are now stricter, this is still possible for creditworthy buyers. The less you borrow, the less you will pay in interest payments.
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Compute your monthly payment. This can be done using a financial calculator as long as you know the loan principal and interest rate. For example if you are borrowing $10,000 toward the purchase of a car at a 6 percent interest rate for five years, your monthly payment will be $193.33.
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Create an amortization schedule. You can do this by computing your monthly interest payment based on the principal balance of the loan. For the first month your interest is $50 ($10,000 x 6% / 12). Therefore $50 of the monthly payment will go toward interest and the rest toward the principal. For the next month the interest payment will be slightly lower and the payment toward principal slightly higher, based on the new principal balance. This will go on until the principal balance is zero and the loan is paid off. A table showing how much of each monthly payment goes toward principal and interest payments for the life of the loan is called an amortization schedule.
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Figure out total interest payment as this will help you determine how much borrowing is actually costing you. In this case, at the end of five years, you would have paid about $1600 in interest.
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Use an online calculator. This is the easiest way to both compute the monthly payment, create an amortization schedule and compute your total interest payment over the life of the loan. See a link in Resources below for a good online calculator.
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Tips & Warnings
Consider paying off your auto loan early by paying a little extra each month. For example, paying $50 extra each month in the above example will result in $378 savings in interest payments and reduce the life of the loan by 13 months.
