When the time comes to get a new car and you need to finance it, do your homework on car payments. While you can just walk into a dealership and let them take care of it all, you won’t get the best deal. Further, you may end up in over your head.
In this article, you’ll learn how much you can afford, the components of car payments, and how to calculate your car payment. Plus, discover helpful tools that can help you save money and optimize your payments. Let’s get started!
How much can I afford?
Anthony Curren, marketing manager at Rick Curren Auto Sales and Service, says, “To figure out how much a customer can afford, the first thing they need to do is break down their budget. I normally tell people to figure 10% of their monthly income is pretty affordable, and I pull up a tool to show them what they can expect in a car payment.”
Monthly car payment calculator
Instead of entering random rates and terms in an online calculator, find out what rates you really qualify for with SuperMoney’s auto loan offer engine. Answer a couple of questions and you can compare the monthly payments of several lenders. See below for more details on how to do it.
Car payment components
How do car payment calculators work? You plug in the numbers, and they do the math. Here are the basic components of a car payment you should know.
- Car price: The price of the car you want to purchase. You can figure this out by looking up the blue book price or shopping around with private parties or dealers.
- Loan term: The number of months it will take you to repay your loan amount in full.
- Interest rate: The percentage of the loan that you will pay per year in interest.
- Down payment: The amount you will pay up front for the car.
- Trade-in value: The amount you can get for trading in your vehicle at the time of purchase.
- Sales tax: The percentage of the cost you will have to pay due to your state’s tax laws.
- Title, registration, and other fees: Miscellaneous costs you will have to cover in the process of buying a car, such as document fees and the destination fee.
The down payment and trade-in value will be subtracted from the car price, and the sales tax will be added. In some cases, you will be able to roll the title, registration, and other fees into the loan, while in others, you will have to pay them upfront. The total borrowed amount plus the interest will be divided by the number of months in the loan to get the monthly payment.
5 steps to calculate car payments
Ready to calculate your car payment? Here’s how to do so in five steps.
- Figure out your budget. Estimate that 10% can be allotted toward your car payment.
- Identify a vehicle you want to purchase and its price.
- Check your credit.
- and find your best rate.
- Use a monthly car payment calculator to estimate what your monthly payment will be and how changing factors will influence it. Find the payment structure that works best.
Car payments example
- Kathie has a $5,000 monthly income, so figures she can spend $500 per month on her car.
- She wants a 2017 Ford Fusion which costs $22,000, on average. She lives in California where the sales tax is 7.5%, and the estimated fees come out to $3,450, according to the CarMax calculator. With all the fees and taxes, the total cost before interest will equal $27,100.
- She checks her credit and finds out she has a good credit score and no discrepancies.
- Using SuperMoney's auto loan offer engine, she finds a loan with a 4.5% interest rate.
- Using a car loan calculator, she compares how changing the term loan and down payment impacts the monthly payment. With a 60-month loan term and $2,000 down payment, her monthly payment would be $372.86, while with a $5,000 down payment, the monthly payment would be $316.93. She decides that the $5,000 down payment will keep her monthly payment down, allowing her to keep money in her budget for maintenance and insurance.
Car payments considerations
It’s important to leave some room in your budget to cover extra costs. “Often, the payment is about where customers wanted to be, but they haven’t considered the other costs such as insurance (especially if they don’t already have it), gas, maintenance, and the like,” adds Curren.
Further, extending the loan term will result in paying more interest which increases the total cost. You’ll have to weigh whether you prefer a lower monthly cost and higher total cost, higher monthly cost and lower total cost, or something in the middle.
Lastly, paying a higher down payment will help to lower the amount you pay towards interest. However, if you can’t afford it, higher costs over time will be a better option (and the only option!).
How to get the lowest car loan interest rates
Where do you go for the best rate on your car loan? Well, that depends. It’s not the same for everyone. Many people go to a dealership to get a car and financing.
While it may seem easier, you often won’t get the best deal. In fact, a 2017 study found that those who shopped around with at least three lenders saved more on their auto loans than those who didn’t.
Where do you start your shopping? You can apply with your bank or credit union, but there are many other options as well. In the last 10 years, many online lenders offering loans have cropped up. You can now apply online, get an instant answer, and then take it from there. However, it still takes time to visit each lender’s website, apply, and compare offers.
You simply answer a few questions and then, within about two minutes, you will get prequalification offers from the lenders with which you are qualified. Further, it doesn’t hurt your credit to get the quotes.
You can then compare the lenders side-by-side and choose the best deal. Once you get it, you’ll be able to shop for a car as a cash buyer, giving you more leverage in your negotiations. This isn’t to say you shouldn’t see what the dealer will offer you; just be sure to compare it with other options.
Once you know your interest rate, you will be able to calculate your car payments accurately. With the best rate, you can save some money, too!
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.