How to Figure Car Loan Payments

The sticker price you see on a car window usually is not the amount that you will actually end up paying for the vehicle. In fact, due to interest on a car loan, you can end up paying significantly more over time than the sticker price shows. Car loans are calculated with amortization factored in, meaning the interest charged changes as you pay off more of the balance.

Instructions

1

What amount of the car purchase is being financed? Include, taxes, licenses and fees if they are being rolled into the loan.

2

What is the term of the loan? Some are three years, while others run for five years. You also need the interest rate to compute the monthly payments; the interest rate will then be converted into decimal form. For example, if the rate is 5 percent, the decimal form will be .05. If your loan is five years, you will make 60 payments. Web Math says that due to amortization, the interest rate will be figured per payment. For example, if the rate is 5 percent, you divide the decimal form, or .05, by 12 to get .0042, or the interest rate at the time of payment.

3

Set up the formula to figure out your payments. According to Web Math, your payment will equal I x Loan Amount / 1 - (1+I) ^-n. Web Math notes that I represents the interest rate at the time of payment and n represents the number of periods. So if the loan amount is $20,000 and your interest rate is 5 percent on a five-year loan, by plugging the numbers into the formula you would pay $377.42 each payment. Web Math notes that in this example you will pay $2645.48 in interest. To finish the equation by hand you must do the parentheses first by adding 1 to the interest rate at payment in decimal form, which is .0042, to get 1.0042. Then multiply that to the -60 power to get .078, and subtract that from 1 to get 0.222 as your final answer on the bottom of the equation. On the top, multiplying the loan amount of 20,000 by the interest rate at payment of .0042 gives you 84. To finish, 84 divided by the bottom figure of .222 gives you $377.42 as the monthly payment.