If you’ve never understood how to calculate car payments before acquiring a car on loan or lease, we’ll help you. It is important to master the formulae of calculating the amount of money you’ll be paying every month before settling for the deal.
The process of calculating monthly car payments is the key to determining what you can afford to pay. Once you’ve completed the price negotiation process, you are in the best position to calculate monthly car payments for the car.
Tips on How to Calculate Monthly Car Payments
Getting the best tips on how to calculate monthly car payments puts you in the best place to decide what car purchasing plan to choose. Below are the tips to consider.
1. Understand Your Loan Options
Before you get going with your loan’s numerical calculations, you should acquaint yourself with the kind of loan you are bargaining for. Is it an amortizing loan or an interest-only loan that you want? They both offer sustainable payment options.
The amortizing loan principles demand that you settle the loan every month, with every installment carrying a portion of the principal amount and interest. On the other hand, the interest-only loan demands that you pay interest and nothing on the principal.
2. Internalize Your Loan’s Monthly Payment Formula
Now it is time to get real with numbers and see what actual amounts you will be dealing with rather than speculating on how to calculate monthly car payments. Based on the formula you chose, you can calculate your loan repayment as follows:
a. Amortizing Loans Monthly Formula
The monthly formula for paying your amortizing loan is:
Loan Payment (P) = Amount (A) / Discount Factor (D)
The formula breaks down in the following sequence:
- The total loan amount is (A).
- The discount factor (D) is calculated using the formula: D = {[(1+r)n] – 1} / [(1+r)n]
Where;
- (r) is the periodic interest rate, and you can calculate it by dividing the annual interest rate (converted in decimals) by the number of payment periods, and
- (n) is the number of periodic payments, which you can calculate by multiplying the payments per year by the number of years.
- In an example, the formula would apply as follows:
Assuming you secure a loan of $30,000 from your financial institution and they are offering an interest rate of 3% for five years, you will be paying the following amount:
- N will be 60, i.e., n = (5 years x 12 monthly installments per annum).
- R will be 0.0025, i.e. r = (the 3% rate converted into 0.03, then divided by 12 installments for every year).
- D will be 76.2680, i.e. D = {[(1+0.0025)60] -1} / [0.0025(1+0.0025)60].
- P will be $393.35, i.e. P = (30,000 / 76.2680).
- With this formula, your monthly loan payment (P) will be $393.35, which includes a portion of both the interest and Principal Loan amount.
Pro Tip: The car loan payment doesn’t cover insurance costs. To leverage the debt, you need to get the cheapest insurance quotes featured in this post.
b. Interest-Only Loan Payment Formula
If you opt for the interest-only loan payment formula, you will have to calculate your loan using the formula below.
Loan Payment (P) = Loan Balance (B) x (Annual Interest Rate / 12).
With the above example, your loan payment will be calculated as follows:
P = (30,000) x (3% /12)
= (30,000) x (0.03 / 12)
= (30,000 x 0.0025)
P = $75.
This means you will have to pay $75 every month for your monthly interest-only payment plan—a cheaper but more demanding loan payment option in the long run.
Depending on the monthly payment amount that each loan attracts, you can choose the plan that works best for you. While the interest-only draws a lower monthly payment, you will owe the full principal amount later. You can seek more advice before choosing.
3. Go for the Leasing Option
You may not be well-placed (financially or otherwise) to settle for a full loan payment plan when in need of a car. But you can opt for the leasing option. Before settling for this option, you will need to know your deposit and monthly amounts.
You can always check the car’s future value after the lease is over, especially if you are leasing for more than a year or so. You will then have to subtract the future value from its current price to calculate the monthly car payments you will have to make.
4. Calculate Using Financial Terms
You can agree with the financial institution or whoever is financing your loan to settle for the financial payment formula where a deposit is included. The agreement has to include a deposit in the payment plan to ease your payment burden.
The down payment has to be a minimum of 10 percent of the purchase price. It would be best if you then worked out a reasonable interest rate, subtracting your down payment from the principal amount and getting the amount you will owe. From there, you can calculate monthly payments.
5. Use an Online Calculator
What happens if you completely don’t know how to calculate car payments? You do not quit, and instead, you get help from the available online calculators. All you need to do is get the correct values and insert them in their rightful online calculator spots.
There are several online calculators you could choose for various loan payment plans. If you need one for amortizing loans, then this one from Credit Karma may be of great assistance. For an interest-only loan payment option, you can try Mortgage Calculator.
Final Words
With everything settled and a car loan on its way, you have to put a plan in place on how to repay the loan. Paying off the loan before the time you are to repay it expires is advantageous. You’ll save on interests as long as there are no prepayment penalties. The most satisfying thing is that you now know how to calculate car payments.
