When shopping for a new car it is wise to estimate monthly car payments for each vehicle you look at during your visit to the dealership. This way you immediately have an idea of whether you can reasonably afford the vehicle before you get too attached and start negotiating with the salesperson. Of course an online calculator is quicker, but you can also do this with a formula if necessary in five basic steps.
The rate is the interest rate that you estimate you will have to pay for the car loan. You can get a quote for the likely rate from a third-party lending institution after providing some basic information about the car. The dealership also offers financing options but from a wide variety of sources, so it is difficult to estimate a rate by asking the salesperson. Assume for the purpose of an example a car loan interest rate of 7.5 percent or .075 and represent this figure with the letter "r."
Check the price tag on the car to figure out the principal of the loan. The principal is the amount you plan to borrow. Once you have the price, deduct the amount of any down payment. So for example, assume that the car price is $10,000 and you plan to make a down payment of $1,000. The principal (P) is $9,000 in this example.
Know the Compounding Frequency
Next, know the frequency with which the lender will compound the interest on the car loan. Compounding is when interest is charged on top of interest that has already accrued in addition to the principal. Monthly compounding is common for a car payment, so you must use the number 12 in the car payment formula.
Determine Length of Loan
Car loan repayment periods commonly ranges from 24 months to as long as 72 months. Choose the loan term you feel most comfortable with. Remember that the longer the term, the less the monthly payment amount but the more interest you'll pay over time. Assume a 48-month loan and use the letter "L" for the loan length in this example.
Plug Into Formula
The final step of calculating your monthly payments is to plug the figures you gathered into the formula. The formula to use is P*(r/12)/(1-(1+r/12)^-L). When you plug in the amounts from this example the formula reads 9,000*(.075/12)/(1-(1+.075/12)^-48) or about $217.61 per month.
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