How Is My Car Loan Payment Calculated?
Wouldn't it be nice if there was a simple answer? There are a lot of factors that can contribute to your car loan payment. Learning about the different factors now before you go shopping for a new car may save you thousands of dollars when you are ready to purchase a car or refinance your current car loan.
What's my rate?
Your rate can vary based on your credit score. That's why it's important to keep track of your credit score. Learn what a good credit score is and what affects it the most. Your rate is also affected by the term of the loan, which is the number of months you choose to pay off the loan. The longer the term, the higher the interest rate.
What's the best term?
The longer the term, the more it'll cost you by stretching the payments to 60 or even 84 months. With a $20,000 loan at a 3% interest rate for a 48-month term, you'll pay about $1,250 in interest. Choose a 60-month term at that same 3% interest rate and you'll pay around $1,565 in interest. Calculating your car loan payment based on different terms can also give you a quick snapshot of what your monthly payment might be.
Do I need a down payment?
Some dealerships may not require a down payment. But by using cash or trading in a vehicle that you own, you'll need to borrow less for the purchase, which means you'll pay less in interest over the life of the loan. If you can put some extra money toward the purchase, it could also make the payments more manageable each month.
What could increase my payment even more?
You can oftentimes choose additional features such as Mechanical Breakdown Insurance (MBI), Guaranteed Asset Protection (GAP), and more. These extra purchases can be a good choice to protect your investment, but the cost varies between lenders and car dealerships. Decide before you purchase if this is something you are interested in adding to your loan. A good loan officer will be able to help clearly explain your options for add-on insurance products.
The more you know before financing your car loan, the better off you'll be in sticking to a payment you can afford and ultimately love your new car loan and payment.