With the average price of a new vehicle sitting above $35,000 and no sign of this number coming down, very few people can afford to pay cash for a new car. If you’re like most people, you’ll be financing the purchase of your next car or SUV, and that means taking out a car loan.
Auto loans are pretty simple once you break them down. You can apply for one from a bank, credit union, or other lending institutions – your car dealer can even help you apply. The car loan company pays the dealer a lump sum for the car, and they technically own it while you repay the loan over several years.
Once the loan term is up, you’ve paid for the car plus interest. Interest is what the auto loan company charges you to borrow the money.
With that in mind, it’s easy to see why your monthly car payment may matter more to you than a car’s MSRP. With our car payment calculator, you can quickly determine how much you’ll owe the loan company each month. That car payment has to fit in your monthly budget, so let’s get started and figure out just what it’s going to be.
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A down payment is the portion of the car’s price that you pay upfront. Because you’ve paid for part of the car with it, it lowers the amount of money you need to borrow and thus lowers your monthly loan payment. As a general rule, you should pay 20 percent of the price of the vehicle as a down payment. That’s because vehicles lose value, or depreciate, rapidly. If you make a small down payment or no down payment, you can end up owing more on your auto loan than your car or SUV is worth. That can come back to bite you if you need to sell the car or if it’s totaled in an accident.
Though putting 20 percent down is recommended, you don’t have to put that much money down. Some car loans don’t require any money down. However, if you have money saved for a down payment, enter that amount in the down payment box of the calculator.
Trade-in value is how much any vehicle you’re trading in for a new car is worth, minus any money you owe on it. When you trade in a car, the dealer buys it from you and applies that amount to the price of your new car. Depending on how much you owe, a trade-in can significantly lower the amount you have to borrow on a car loan and your payments or it can actually raise the amount you’ll need to borrow and the amount you pay every month.
Let’s say you have a trade-in that’s worth $20,000, and you owe $15,000 on it for an existing auto loan. The dealer buys the car from you and applies $5,000 (the difference between the car’s value and what you owe on it) to your new car’s price. That lowers your loan amount by $5,000. This is especially helpful if you don’t have money saved for a down payment.
On the other hand, if you owe $25,000 on that $20,000 trade-in, you have what is called negative equity; you owe more than your car is worth. The dealer will still take the trade-in, but instead of deducting $5,000 from your new car’s price, they’re going to add $5,000. That’s because they are going to pay off your full auto loan when they accept your trade, and they’re going to want that money back. Negative equity raises the amount you need to borrow and your monthly payment, as your new auto loan has to cover your new car and your old one.
It’s not a great situation to be in. This is why it’s important to make as big a down payment as you can when buying a new car – it’ll help you avoid a negative-equity situation like this at trade-in, and you won’t get trapped in a cycle of adding old car debt on to new loans.
To find out how much to enter in the trade-in section of the calculator, check your trade-in value and subtract the amount you owe on your car loan. Then enter that amount in the trade-in value box.