Auto Loans: A Guide to Predictable Repayments

Auto Loans: A Guide to Predictable Repayments

For most people, buying a car is not a simple matter of swiping a card or signing a cheque, and so an auto loan is an excellent way to finance a new car purchase. In order to form a realistic repayment plan, it's crucial to consider more than just the principal, as interest, taxes and dealer fees can all affect the total repayment amount of a loan. Fortunately, calculating the total repayment amount of a fixed rate loan and breaking it down into monthly payments is a matter of simple math, and can help you get a better idea of what taking on a car loan means for your finances.

Determine Initial Financing Amount

In most cases, the total amount needed to finance a new car purchase can be found by subtracting the projected trade-in value from the base price of the car, then adding any sales taxes and dealer fees. For example, a vehicle with a purchase price of $20,000 purchased in a state with 5% sales tax will have an initial financing figure of $21,000 before factoring in any required fees.

Subtract Down Payment

The down payment is the initial payment made on the purchase of the vehicle. The down payment amount for a car purchase can have a pronounced effect on monthly repayments. It may also mean potential benefits on repayment terms, so it can be a good idea to make your initial payment as large as possible. Take out the amount you plan to use as a down payment to see your total financing figure.

Calculate Monthly Payment

Fixed rate car loans carry the same rate of interest throughout the life of the loan, and so calculating the monthly payment is easy. There are a number of payment calculators available online, but if we consider an interest rate of 7% on a loan of $21,000 repaid over 60 months with no down payment will require a minimum monthly payment of $415.83 to satisfy on schedule. Be sure to compare lender rates to get an accurate picture of your total loan cost.

Interest rates and repayment terms may vary by lender or provider, but knowing these elementary numbers can help you get an accurate picture of the cost of financing your new vehicle. When using an online calculator be sure to experiment with different financing amounts, down payment amounts and repayment terms to see how the projected monthly payment could affect your budget.¬

Multiply Monthly Repayment by Term Length

Finally, multiplying the monthly payment by the term of the loan will give you the total of amount payable. For example; 60 monthly repayments of $415.83 add up to $24,949.80. This excludes any lender fees, taxes and other associated charges if these have not been added to the amount borrowed.

Understanding the full financial commitment involved with taking out an auto loan is essential to getting the most from your investment. While calculating approximate variable rate payments is possible in a relatively stable market, fixed rate loans offer consistent interest rates for the entire repayment period, so calculating the exact monthly repayment amount and total cost of the loan is relatively easy regardless of market conditions.