How to Calculate Auto Financing

Calculating the financing for an auto can give shoppers a giant head start on the purchasing process. Often people are blown away by the initial sticker shock of a vehicle, but are overcome by an aggressive salesman promising to get the buyer into an affordable monthly payment. Sometimes this incurs hundreds or thousands of dollars paid over the life of a loan that could have been avoided by simple planning. Having the knowledge how to calculate--and prepare for--auto financing gives buyers additional leverage before ever stepping foot on the dealership lot.

Instructions

Calculating the Financing

1

Sum all costs of the vehicle including the MSRP (manufacturer's suggested retail price or sticker price), add-ons such as 4-wheel-drive and air conditioning as well as the destination charge (often between $300 and $600) and any preparation fees. If you negotiate the sticker price to something less, include only the amount you negotiated. This total is the base price.

Example: $15,000 MSRP + $1,000 4-wheel drive + $250 CD player + $350 destination charge + $50 preparation fee = $16,650 base price

2

Subtract the value of your trade-in (if applicable) from the base price. If the vehicle being traded has negative equity (meaning the amount owed on a loan is more than the value of the trade), you will add the difference to the base price. This is the net equity of the purchase.

Example: $16,650 base - $1,500 trade value + $2,225 left on loan = $17,375 net equity

3

Multiply the base price by your state's sales tax as well as local tax. The combined average typically is around 8 percent but varies by location.

Example: $16,650 * 8.5 state/local tax = $1,415.25 total sales tax

Note: In situations where there is a trade-in, and the trade value exceeds any remaining loan amount, some states allow for deducting the trade value from the base price before configuring the sales tax.

4

Multiply the base price by your state's title and registration rate for finding the transfer fees. These fees are often an additional 1 to 1.5 percent.

Example: $16,650 * 1.5 percent BMV transfer fee = $249.75 title fees

5

Add the net equity, sales tax, title fees and any additional document fees or extended warranty purchases. Subtract the amount of the down payment, if any. This is the amount being financed. Most states allow document fees and warranties to be non-taxable, though there are always exceptions.

Example: $17,375 + $1,415.25 + $249.75 + $750 (warranty plan) + $125 (document fees) - $2,000 down payment = $17,915 amount to finance

6

Multiply the principal (financed amount) by the periodic interest rate (interest rate divided by 12 months in decimal form) to begin finding the amount of the monthly payment. The interest rate is commonly between 7 and 10 percent, though persons with excellent credit will see rates as low as 2 to 3 percent and individuals with poorer credit histories will have rates at 14 or 15 percent. We'll call this the base amount.

Example: $17,915 financed * (8.9 percent or .089 / 12) = $17,915 * (.0074) = $132.57 base amount

7

Add 1 + the periodic interest rate (again in decimal form) and raise the sum by minus the ideal number of monthly payments. If you wanted a loan that lasted 5 years, you would use (-60) as the exponent. We'll call this the term multiplier. To adjust the final payment amount, you can always play around with the loan length to fit into a budgeted monthly payment--just like those sneaky sales people do with unsuspecting buyers.

Example: (1 + .0074 or 1.0074) ^ -60 = 0.6425

8

Subtract the term multiplier from 1. Divide the base amount by this result to find the monthly payment amount.

Example: $132.57 / (1 - .6425) = $132.57 / (.3575) = $370.83 monthly payment