What is My Monthly Payment?
Very few people enter the car buying process with the financial means to pay a vehicle’s price tag in full at the time of purchase, and thankfully no one expects you too. Cars are pricey assets, but you can pull off the lot in a new vehicle with as little as $1,000 down! This is all possible with automotive loan financing. This is a basic concept, and I’m sure most of you understand what financing is; however, determining what your monthly payments will be can be a difficult process if you are not familiar with the number of variables that go into determining this monthly payment figure in the first place. The dealer at which you purchase your vehicle will review these figures with you; however, if you ever find yourself interested in how these numbers are actually calculated, this post is for you!
A monthly payment is calculated using three different variables: the loan amount, the length of the loan (in months), and the bank’s stated interest rate.
The Loan Amount
The loan amount is the sum of money that is lent to you from the sponsoring bank. To make sense of this, here’s an example. If the car you are buying is $20,000, and you put down $5,000 towards the loan (whether it be cash or your trade-in value), the amount lent is $15,000. The more money you put down, the less your monthly payment will be.
The Length of the Loan
The typical auto loan ranges between 3 years (36 months) and 6 years (60 months); however, banks are usually flexible and will issue loans outside of this range. One thing to note is that short-term loans will typically have slightly higher interest rates (i.e. the loan’s interest rate may be slightly higher on a 36-month loan than it will be on a 60-month loan). The longer the loan, the lower your monthly payments will be, and if desired, you can pay more than the stated amount to pay off the loan earlier. In some cases, banks due charge prepayment penalties, so it is important to check with your bank on its policy regarding potential prepayment penalties.
The Bank’s Stated Interest Rate
Depending on your credit history (credit score), the bank will state the lowest interest rate it is willing to provide you with. A high credit score shows a bank that you are a reliable source of on-time payments, and as such, they will quote you a lower interest rate, than someone with a low credit score. As previously mentioned, the interest rate also depends on the length of the loan. Regardless, the interest rate quoted by the bank that you are financing through is applied on an annual basis.
Putting It All Together
These are the three variables that make up your monthly payments. If the specified monthly payment is met each month, the loan will be fully paid off by the end of the stated timeline (i.e. in the 60 months that the loan was granted for). The actual formula for determining your monthly payment is a bit more complex than simply plugging number in to these three variables. To calculate your monthly payment accurately, an online auto loan calculator is extremely useful and can be found using Krietz Auto’s online monthly payment calculator here: https://krietzauto.com/