Car payment

Buying a car is a big step, and for most of us paying for it fully upfront just isn't possible. That's why getting a car loan is a common choice: it breaks down the cost into more manageable monthly payments. But, getting into financing without knowing the ins and outs can be a bit tricky.

We're here to break down the process of calculating your car payments and what factors come into play, in a way that's easy to understand. This prep work will help you feel more ready when you are budgeting for the car payment and confident when you're talking deals at the car dealership.

In the world of car buying, you'll come across various terms that might sound different but actually mean the same thing. For example, financing is really just another way of saying you're getting a loan, or borrowing money. Principal is the word for the amount of money you're borrowing to get the car, or the loan amount. The principal can be lowered if you have a down payment or money you saved up. You pay the down payment upfront before borrowing the rest. Also, when someone says note, they're talking about your monthly car payment. And APR? That's just the interest rate plus any extra fees bundled together. Lastly, there is loan-term which is the length of time you have to pay back your loan. Now, let's talk about the roles all these words play when calculating a car payment.

Imagine you're looking at a car priced at $\mathrm{\$}\mathrm{20,000}$‍. The $\mathrm{\$}\mathrm{20,000}$‍ is your loan amount, or the amount you need to borrow. If you make a down payment of $\mathrm{\$}\mathrm{4,000}$‍, you're reducing the amount you need to borrow to $\mathrm{\$}\mathrm{16,000}$‍. The interest rate your lender offers is crucial; for example, a rate of $5\mathrm{\%}$‍ means you'll be paying back a bit more than the borrowed amount. How long you take to pay back the loan—the loan term—also matters. Typically, car loans have 12-month to 72-month ($6$‍ year) term, but some even go as far as $10$‍ years.

There are many apps and websites that can help you figure out a monthly car payment. Khan Academy also has financial calculators that you can use to help you plan your next car purchase. Let's take a look at the car we discussed earlier and see how much it would cost each month if we finance it.

Here is the information:

Putting these values into a monthly payment calculator gives us a monthly payment of $\mathrm{\$}479.53$‍.

The amount you pay each month for your car can change based on a few things. Of course, if the car's price is lower or you pay more money at the start (a bigger down payment), your monthly payments will be less. But, there's few more factors that can change it.

So, things that lower the monthly payment are:

When you choose a longer loan term, your monthly payments might be smaller, which can seem like a great deal. However, with a longer-term loan, you pay interest not only at a potentially higher rate, but also for a longer period of time. So, even though your payments each month are lower, the total amount you'll end up paying could be a lot more.

Understanding how your monthly payment and total loan cost are connected is important, especially when choosing a loan term. Don't worry if this seems a bit complicated - we're going to explore this topic in more depth in our upcoming articles and videos. So, stay tuned!