How to Calculate Car Payment by Hand

Many online calculators are able to calculate a car payment in seconds, but the formula to compute the monthly payment by hand is not very complicated and will not take much longer. The amount of a monthly car payment depends on the amount borrowed, interest rate and the number of months in the repayment term.

Interest Rate

The monthly car payment depends heavily on the interest rate you are charged on the loan. When you obtain a loan, you will know the annual interest rate. Convert this from a percent to a decimal by dividing it by 100. Then convert it from an annual interest rate to a monthly interest rate by dividing it by 12. For example, with an annual interest rate of 8 percent, convert it to a decimal rate of 0.08. Divide by 12 to find a monthly interest rate of 0.00667. This rate, called the periodic rate, is the amount by which your loan balance is multiplied each month to find out how much interest you owe for the month.

Monthly Payment

Set up a fraction to compute the amount of the monthly payment. For the top of the fraction, multiply the monthly interest rate by the total amount of the loan. For the bottom of the fraction, add 1 to the monthly interest rate and raise this to the negative power of the number of months in the repayment term. Then subtract this answer from 1. For example, say the loan is for $19,000 to be repaid over 48 months. The top of the fraction is $19,000 times 0.00667, or $126.73. The bottom of the fraction is 1 - (1 + 0.00667)^-48, which simplifies to 0.273. Divide $126.73 by 0.273 to calculate a monthly payment of $464.21.

Calculate Total Interest

After calculating the monthly payment for the car, you can use that to calculate how much interest you will pay over the life of the loan. To do this, multiply the monthly payment by the number of monthly payments, which will give you the total amount you will pay. Subtract the amount of the loan from this to find the total interest you will pay. For example, multiply $464.21 times 48 to get a total of $22,282.08. Subtract the loan amount of $19,000 to calculate $3,282.08 in interest payments.

Considerations

When deciding what type of auto loan to get, the wisest choice is to get the shortest term of loan that you can reasonably afford. A loan with a shorter term has higher monthly payments but lower total interest payments. This will help you pay off your car quickly and less expensively. It also helps prevent you from becoming underwater on your car, which is when you owe more on the loan than the car is worth.