How to Calculate an Auto Loan Payment

Before you even go to the dealership to shop for a new car, it's a smart idea to do some budgeting tasks to find out what you can and can't afford. Based on your current income, what car payment will fit comfortably in your monthly finances? You can do a simple calculation to estimate your auto loan payment by using a few pieces of information regarding your impending car purchase. Don't step foot into a car dealership, full of professional sales sharks, without having a reasonable point of reference about how much you can afford when you're making your final decision.

Instructions

1

Determine the average price of the type of car that you are looking to buy, based on the model and body type, such as a sedan, station wagon, convertible or SUV. You need a solid dollar figure for what the dealer will likely charge you. Visit Kelley Blue Book to look up vehicle prices. In this example we will use $10,000 as the purchase price.

2

Subtract the down payment that you plan to make on the car--and the value of your current car if you plan to do a trade-in--from the purchase price to get the final amount that will be financed. Let's say that you are putting $2,000 down, so that leaves an $8,000 balance to be financed.

3

Calculate your sales tax on the purchase into the car loan unless you plan to pay the tax out of pocket. Multiply your local sales tax rate by the purchase price--before deductions. So for a 7 percent sales tax rate, there will be a tax fee of $700 built into the loan in our example for a total of $8,700 (principal). Add any other fees that might be charged by the dealership, such as a document processing fee.

4

Estimate the interest rate that you will pay on your auto loan. Your interest rate will be based mostly on your credit rating. An excellent score of 700 and above may qualify for an interest rate as low as 4.99 percent or lower, while a low score of 500 will be charged a high interest rate, possibly 14 percent or more. In this example let's use a 10 percent interest rate.

5

Determine the length of the auto loan. Most car loans last for about five years or 60 months, while others can extend as long as 84 months or seven years. We'll use 60 months in this example.

6

Calculate the monthly payment based on these factors. To do this manually, you will need to use a formula: P (r/12) / (1-( 1+r/12)^-m). "P" stands for principal, "r" stands for the interest rate and "m" stands for the number of months for the loan. The resulting monthly payment in our example is roughly $184.85.