How to Figure Car Financing
Most drivers purchase new vehicles by financing them rather than paying the full cost up front. If you finance a new or used car, your monthly payments will be based on the amount you borrow, the annual interest rate and the number of months in the loan period. You can figure car financing by hand if you know these three variables. Knowing the monthly payments on an auto loan will help you stay within your budget when you shop for a new vehicle.
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Instructions
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Calculate the monthly interest rate of your auto loan by dividing the annual interest rate by 12. Express the monthly interest rate as a decimal and call it R. For example, if the annual interest rate is 9%, then R = 0.09/12 = 0.0075.
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Count the number of months in the loan period, and call this number N. For example, if you take out a car loan for five years, N = 60.
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Determine how much of the car's value you wish to finance, and call this value P. For example, if you take out an auto loan for $9,000, P = 9,000.
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Compute the quantity M = P*R*[(1+R)^N]/[(1+R)^N - 1]. M is value of your monthly auto loan payments. (Note that in this expression, N is an exponent. Be sure to use the exponent button on your calculator, and not the multiplication button.)
For example, suppose R = 0.0075, N = 60 and P = 9,000. The monthly payment based on these values is M = (9,000)(0.0075)(1.5657)/(0.5657) = 186.82. This means you will pay $186.82 every month for 60 months.
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Tips & Warnings
The expressions M = P*R*[(1+R)^N]/[(1+R)^N - 1] and M = P*R/[1 - (1+R)^(-N)] are equivalent formulas for calculating monthly payments. The latter expression is simplified from the former expression. Use the second equation if your calculator allows you to input negative exponents, otherwise, use the first equation.
References
- Photo Credit The new powerful car in modern city image by terex from Fotolia.com
