How to Factor Auto Loans Based on Interest Rates

Buying a car involves being able to afford the monthly payment on a loan. Monthly payments depend on the vehicle price and the finance term. However, since the majority of vehicle loans involve interest, which is what a lender charges to lend money, you must factor in your interest rate when figuring your auto loan payment. Once a lender determines the rate on your auto loan, you can calculate the payment using a simple formula.

Instructions

1

Write down the maximum that you're willing to pay for a vehicle. Research different cars, and once you decide on a make, model and year, record the new or used price for the vehicle.

2

Determine a car loan term. The shorter your finance term, the less you spend on interest payments. The average car term is between 36 and 60 months. Be prepared to pay a higher auto loan payment with a shorter term.

3

Call local banks or finance companies for information on current auto loan rates. Acquire your personal credit score from one of the three major bureaus -- Experian, TransUnion or Equifax -- or order your score from Myfico.com. The bank can quote an interest rate based on your credit score.

4

Calculate the formula (P x (i / 12)) / (1 - (1 + i / 12)-n) to determine your payment. The letter (P) stands for principal, (i) stands for interest and (n) represents the number of months in the loan term. The formula with a 4.25 percent interest rate on a $20,000 auto loan for five years is the following:
($20,000 x (4.25% / 12)) / (1 - (1 + 4.25% / 12)-60) = $370.59 (monthly payment).