How to Calculate Your Monthly Car Payment
Buying a car is an exciting event, but it’s also a significant financial commitment. Before you step into a dealership, it’s vital to understand how to calculate your monthly car payment to ensure your budget can support the vehicle you want to buy.
At Mike White Ford in North Idaho, we want to empower you with the tools and knowledge you need to make informed decisions about how much car you can afford. Here’s a guide to understanding car payments and how to calculate yours.
The Basics of Car Payment Calculations
Five main factors determine your monthly car payment:
- Loan Amount: The total cost of the vehicle (including fees) minus your down payment and any trade-in value.
- Loan Term: The time you’ll take to repay the loan, typically 24 to 72 months.
- Interest Rate (APR): The annual percentage rate is the loan rate offered by your lender and is based mainly on your credit score
- Down Payment: The upfront amount you pay reduces the total loan amount and will reduce your monthly payments
- Taxes and Fees: The additional amount over and above the vehicle cost that you will need to pay in applicable taxes and fees such as loan fees and vehicle registration
Tools to Simplify the Calculation
The good news is that you don’t have to be a financial wizard to crunch the numbers. There are numerous resources available to help you calculate your car payment:
- Apps: Apps like Auto Loan Calculator+ or Cars.com’s Car Loan Calculator make it easy to input loan details and get an instant estimate.
- Websites: Online calculators, such as those on Bankrate.com or Edmunds.com, provide detailed breakdowns of payments, interest, and total loan costs.
- Templates: Spreadsheet software like Microsoft Excel or Google Sheets have pre-made loan calculation templates that allow you to tweak variables and see how changes such as a lower interest rate, a longer term, or a larger down payment can affect your monthly payment.
Before going into a dealership, spend some time on one of these apps to get an idea of what a car payment would approximate if you purchase a vehicle you are eyeing. These tools are very useful for finding out what the payment for a car at a given price would look like. Be sure, however, to add in the cost of taxes and fees, which can amount to as much as 10% of the vehicle price.
Benchmarks for What You Can Afford
Generally, financial experts recommend that your car payment not exceed 15% of your monthly take-home (net) pay. For example, if your monthly income after taxes is $4,000, your car payment should ideally be $600 or less.
However, don’t just use these numbers blindly and max out your budget. Your car payment should be comfortable. It’s also important to factor in other monthly expenses, such as:
- Existing debt (e.g., student loans, credit cards, or mortgages)
- Insurance premiums, which vary based on the type of car you purchase
- Fuel and maintenance costs
Lenders use a similar benchmark called the Debt-to-Income Ratio (DTI) to determine how much they will loan. Your total debt (including the anticipated car loan) should be less than 36% of your gross monthly income.
The Impact of a Down Payment
Today, many lenders will extend a car loan to a customer with a good credit score even if you provide no down payment. However, making a sizeable down payment will reduce your loan amount, which will reduce the amount of your monthly payments and reduce the amount of interest you pay over the life of the loan.
For example, let’s say you’re purchasing a car for a total cost of $30,000 with an APR of 5% on a 60-month loan:
With a $5,000 down payment: Your loan amount is $25,000, resulting in a monthly payment of approximately $472.
With no down payment: Your loan amount is $30,000, resulting in a monthly payment of $566.
As you can see, a down payment of $5,000 saves you over $90 per month. It will also save you $661 in interest over the life of the loan.
How Mike White Ford Can Help
Calculating your car payment is the first step toward confident car buying, but you don’t have to do it alone. At Mike White Ford, our financing team is here to guide you through every step of the process. We can help you explore loan options, evaluate what fits within your budget, and even assist with pre-qualification through our trusted network of lenders.
Ready to find your next vehicle? Visit Mike White Ford at either our Coeur d’Alene or Sandpoint showroom. Whether you’re buying new or pre-owned, we’ll work with you to find financing that meets your needs and puts you on the road in the car of your dreams.