How to Calculate a Car Payment: Our 2 Minute Guide

We all know that borrowing money to buy a car in requires a monthly payment to repay. But do you know what goes into that monthly payment or how to calculate a car payment? Our  auto loan team explains exactly what’s going on each month with the calculation of car loan payments.

What Goes Into The Calculation of Car Loan Payments

An auto loan is the second largest expense most of us will have in our lives. Aside from a mortgage, we will spend more on cars than on anything else so it’s important to understand as much as you can about the process.

When you first take out an auto loan, you will agree a principal amount to borrow, an interest rate and a term for the loan, how many month’s you’ll be paying it. All those things combine to make up your monthly payment.

Essentially, your monthly payment is made up of principal amount + interest / loan term. This is how to calculate a car payment.

If your Grimsby auto loan includes fees, these are usually broken down and added to your monthly payments.

The Principal Amount

The principal amount on a car loan is the headline amount you borrow. That’s the loan you’re going to use to buy the car.

The amount you borrow will be determined by your budget, the car you want to buy, your credit score, income and affordability. All those things will combine to decide how much you’ll borrow for the loan.

The more you borrow, the more you’ll have to repay each month to have it all paid off by the end.

Interest Rate

The interest rate has to cover the rate the lender will pay to the institution or investor they borrow from and a little on top for profit.

Interest rates will also include cover for risk. The higher the risk you are perceived to be as a borrower, the higher the interest rate you’ll be charged.

This is purely a financial decision and nothing personal. If you have bad credit or less than perfect credit history, your perceived risk will be higher than someone with perfect credit. The lender will hedge their bets with a slightly higher interest rate to cover themselves against potential lost.

Again, nothing personal.

The interest rate is charged annually, broken down into daily amounts, multiplied by the payment schedule (usually monthly) and added to your monthly payment.

Loan Term

The loan term is the number of months you’ll be repaying the loan. This is calculated in years but expressed in months as that’s how we all pay our auto loans. So, a five year loan is expressed as 60 months, 6 years as 72 months and so on.

The term influences your monthly payment because you need to have all the principal paid off by the end, plus interest.

The longer the loan term, the lower the monthly payments. The shorter the loan term, the higher the monthly payments.

Working out monthly payments for an auto loan in Grimsby can be complex but is logical. Using a loan calculator is usually much easier!

If you're ready for a car loan in Southern Ontario, we'd love to help with that! simply fill in the form below to get started.