In the process of shopping for a car? You have a lot of decisions to make.
When most of us think of car shopping, the first thing that comes to mind all of those choices of automobiles we have available to us. There are so many makes and models to choose from, it can be hard to know where to begin. And, even once you have a type of car in mind, you have to consider the color and all of the various options: do you want satellite radio? Do you prefer the bigger engine or the more fuel-efficient one? Sunroof, anyone?
However, if you are car shopping, there is another major choice that you will have to make that goes beyond the particular car you ultimately choose. That choice is: how much are you willing to spend?
The answer to this question will have very important ramifications for how much money you have to borrow in order to buy the car you want. And, of course, that will determine how big your car payments will be. Buying a car is always going to be a balancing act between getting just the car you always wanted and being able to afford the monthly payments.
If you are looking for an auto financing calculator, here is how to calculate your car payments yourself in 3 easy steps:
1. Make certain assumptions about vehicle cost, amount of your down payment, and the interest rate you will be paying:
There are just a handful of factors that will determine how much your car payments will be. Prepare for your calculation by making 4 important assumptions about your upcoming auto-purchasing process:
a. what will be the total sales price of the car?
b. how much money are you able to put down on the car at purchase?
c. what is your expected interest rate? Let’s call this “r”.
d. over how many months do you plan to pay down the loan? Let’s call this “m”.
Now, subtract “b” from “c” to figure out how much money you will need to borrow. Let’s call this “P” (for principal).
2. Calculate your car payment using this formula:
Here is the formula for calculating your car new payment:
P (r / 12) / (1 – (1 + r / 12) – m )
As an example, let’s assume that your assumptions above were as follows:
P = principal, or amount you will borrow = $12,000
r = loan interest rate = 0.08
m = 48 months
To calculate your car payment given the above-mentioned assumptions, plug in the variables so that your formula becomes:
12000 (0.08 / 12) / (1 – (1 + 0.08 / 12) – 48 )
The correct answer in this case is: $292.96.
3. Now, go back to step 1 and try a different set of assumptions:
That’s it! Now, depending upon whether you can afford that monthly payment amount or not, go back to Step 1 and try a different interest rate or loan amount and try it again.
Hint: you can easily do this calculation with a financial calculator, but using MS Excel may be one of the most convenient ways to do it since it allows you to plug in different possibilities and compare the results.