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Calculating Car Payments the Easy Way

Buy Smart & Finance Wise: Calculate Your Car Payment

Calculating car payments is necessary, especially if you find yourself in the following scenario:

Your car breaks down. It’s either too expensive to get fixed or too old to get repaired. You don’t have the cash to buy a new car, but you need a car for your daily routine.

What do you do when your funds are low and your needs are high? You finance it.

When to Finance

Even if you don’t believe in borrowing money, you should consider it in a case like this. For many people, owning a car is the only way they can get back and forth to work or school. If you need a car for your daily routines, making a decision to fund it should be easy. Borrowing money to finance a car is like owning an insurance policy—it’s indispensable when you need it.

Can’t Get a Traditional Car Loan?

Worried about your credit? If your credit score is not strong enough to get traditional financing, then dealer or in-house financing may be right for you.

Advertised as “buy here, pay here” or “in-house financing,” dealerships that provide this service may offer more flexible payment arrangements if you have poor credit. Dealer financing is an arrangement in which a dealer finances your vehicle at the car lot. You’ll have to make regular monthly or bimonthly car payments at the lot.

Is Dealer Financing Safe?

Consumers have protection because dealerships face regulations from both the federal and state governments, according to the Dealer Business Journal. This protects against such things as high interest rates or being charged exorbitant late fees. To provide consumers with adequate disclosure and financing terms, dealers must adhere to the Truth in Lending Act, notes the FTC. State laws vary, so you should check your individual state’s website to get a better understanding of your rights and protections.

Dealer financing may cost more in interest and fees, but at least you’ll drive home with a car.

Understand Your Monthly Car Payment

Before you finance your new or used vehicle, understand the costs. According to Bankrate, a car loan of $10,000 with a loan term of three years (or 36 months) and interest rate of 3 percent would result in a $290.81 monthly car payment, with $469.16 in total interest. That same loan with the same interest rate for five years (or 60 months) would cost $179.69 per month, with $781.40 in total interest.

Calculating Car Payments the Easy Way

Follow the four-step system below.

  1. Calculate the purchase price: This would include the cost of the car that you are buying and any additional optional items. Use “P” for purchase price.
  2. Estimate the length of the loan in months: You can play with these numbers. For example, a three-year loan would be 36 months, and a 5-year loan would be 60 months. Use “n” to calculate this.
  3. Determine the interest rate: According to Bankrate, for the last three months, the interest rates for auto loans were between 4.03 and 4.71 percent. Use “i” for interest.
  4. Calculate:
  • Key terms: P = purchase price, i = interest rate, and n = number of months
  • Input your answers from the key terms into this formula M = [(P x i)/12]/[1 -- (1+i/12]^-n]
  • Example: Purchase price $10,000, 4% interest rate, 48 months: [(10,000 x 0.04)/12]/[1 -- (1+0.04/12)^-48] = $225.79 per month

Being able to calculate car payments is a valuable tool to have in your financial arsenal. It not only helps you get a handle on your current cash flow, it improves your ability to make wise purchasing decisions.

Image source: Flickr

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1 Response to Calculating Car Payments the Easy Way

  1. April Cook says:

    I need to get a new car, but I was having trouble figuring out how large of a payment I could make each month. This is a great equation and will help me a lot. I think knowing how to calculate this myself will help me to feel more comfortable when I look into financing options. Thanks for the help!

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