Calculating Your Car Loan Payments
When it comes to calculating your car loan payments, there are three things that you need to take into consideration. These are principal amount (principal), interest rate (rate), and repayment term (term).
Principal (P)
This is the amount of money that you are borrowing. In the case of a car loan, this is usually equivalent to the price of the car that you are purchasing, less any cash down payment that you are willing to pay.
Rate (R)
The interest rate is the lender’s profit on your loan. Car loan interest rates are affected by a variety of factors. These include the amount of the loan that you are getting, the loan term, and the creditworthiness of the borrower.
Term (T)
This is the length of time that you will be making your payments. In Canada, most lenders offer a minimum of 12 months and a maximum of 96 months. The longer the term, the lower the monthly payments, but the higher the interest rate.
Example of a Car Loan Interest Calculation
The formula for calculating the total interest on a car loan is as follows:
I = P x R x T
To demonstrate how the formula works, we will use an example. Let’s say that you are purchasing a new car for $40,000 with a loan term of 1 year and a 10% interest rate.
$40,000 = P ; 10% = R ; 1 year = T
I = $40,000 x 0.10 x 1
I = $4,000
P + I = $44,000
Monthly Payment = $44,000 /12 = $3,666.67
If you are having a hard time understanding the math, you can actually use an online car loan calculator instead. It’s a fast and easy way to get an idea of how much you will be paying in monthly installments.
Online Car Loan Payment Calculator
Most Canadian lending institutions provide a loan calculator that will help you to easily figure out what your monthly payments will be.
Here are some of the companies you can check out:
Frequently asked questions
Is it better to finance a car or buy it outright?
Is it advisable to choose a longer repayment term?
How do you know if the online car loan calculator is accurate?
Conclusion
Don’t let the fear of car loan interest rates stop you from buying your dream car. Knowing how to calculate the monthly payments of a car loan is a great way to make sure that you are making the best financial decision for your needs, and will give you added peace of mind in knowing that you are making a smart financial move.