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How to calcculate monthly payment for an auto loan

The monthly payment of an auto loan is calculated based on the following formula: \[ mp = Amount \frac{Rate(1+Rate)^{Term}}{(1+Rate)^{Term} - 1} \] Where Amount is the total loan amount that is: Price + Tax - Downpayment. If you include the fees into loan, the total fee amount will be added into the total loan amount.
Rate is the monthly interest rate that is calculcated by using annual interest rate divided by 12.
Term is number of month of the loan term.

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Auto Loan & Vehicle Financing

American auto buyers take out billions of dollars in auto loan & vehicle financing each month, with the average new car loan reaching a record $31,722 in 2019 based on the Experian research report. That is a lot of money to pay back.

Whether you are shopping for your very first car or you are looking to buy a new car instead of leasing for the first time, the process can be a bit overwhelming, especially for first-time buyers. Shopping for a car should be an exciting experience, even if some of the more tedious parts of the process - like haggling with salespeople or searching for the best auto loan for your vehicle - are not. There isn’t any one-size-fits-all best car loan. It is extremely important for you to take the time to understand how auto loans work and make the right decision for your own financial situation.

Here’s how car loans work.

When you take out a car loan from a financial institution, you receive your money in a lump sum, then pay it back (principle plus interest) over the length of the loan. How much you borrow, how much time you take to pay it back, and your interest rate all affect the size of your monthly payment and the total amount. Here are the 3 major factors that affect both your monthly payment and the total amount you’ll pay on your loan:

1. The loan amount. It can be significantly less than the value of the car, depending on whether you have a trade-in vehicle and/or making a down payment.
2. The annual percentage rate. Usually referred to as the APR, this is the effective interest rate you pay on your loan.
3. The loan term. This is the amount of time you have to pay back the loan, typically 36–72 months.

Use our auto loan calculator to adjust the numbers and see how differences in loan amount, APR and loan term can affect your monthly payment and total amount.

How much can you afford for your car?

A lot of people prefer to shop by their monthly payment budget, especially first-time car buyers. The monthly payment is a number that is very easily manipulated by changing auto loan terms. The bottom line is the total amount you will pay over the length of the auto loan.

Play with our auto loan calculators to see the differences.

Credit score and auto loan interest rates

When come to finance a new or used vehicle, your credit score number is one of the most important one. Loan Lenders use it to determine the rate you’ll get on a loan or whether you’ll get a loan at all. Those with higher scores generally receive the better rates.

Experian uses a credit score model of 300 to 850, with super prime borrowers at the top and deep subprime borrowers at the bottom. According for an experian report, borrowers who finance for a new car had an average credit score of 714. Those who borrowed funds for used cars had an average score of 655.

If your credit score falls below the average mark, you might still qualify for a loan. However, you can expect to pay a lot more for the car loan as shown in the table below.

Category	Credit Score	New Car Loan Average Interest Rates	Used Car loan Average Interest Rates
Super prime	781-850	2.6%	3.4%
Prime	661-780	3.6%	5.2%
Nonprime	601-660	6.4%	9.5%
Subprime	501-600	10.6%	15.7%
Deep subprime	< 500	13.5%	19%

Buying vs Leasing

If you’re looking for the most cost-effective option over the long term, buying a used car and keeping it for a few years after you’ve paid it off is often the best choice. On the other hand, if you like having the newest technology or the most-up-to-date safety features? Leasing might give you the freedom to make the periodic upgrades you’re looking for without breaking the bank. In the meantime, lot of the family end up buying a new car for cost-effective and safety reasons. The best decision for you ultimately depends on your preferences, your budget, and how mindful you want to be of any expenses you might incur down the road.

Here are some important figures and costs to look at before making your decision.

Key Category	Potential benefits of leasing	Potential benefits of buying
Down payment	Lower down payment
Monthly payment	Lower monthly payments available
Insurance		Flexible level of insurance coverage
Annual mileage	Normally limited to 12000 miles per year
Repairs	Repairs normally covered by warranty
Depreciation		A new car loses around 30% of its value after 1st year
Others	No selling involved Possible option of new car every few years	Eventual ownership Modify car without fear of breaking contract No mileage limits Sell car anytime after it’s paid off

Dealership Financing vs third-party Lending

It is important for auto loan buyers to understand that auto dealership financing offers may come from the financing arm of a car manufacturer or from a third-party financial institution.

The following table lists the average car loan APR on 36 month term in Q4 2018 by consumer research and ratings firm J.D. Power.

Financial Institutions	New Car Loan Rates(average)	Used Car Loan Rates(average)
National & Regional Banks	4.36%	5.02%
Credit Unions	3.34%	3.61%
Community & Small Banks	4.54%	5.42%
Car Manufacturers – New Car Financing	2.69%	N/A
Car Manufacturers – Leasing	4.95%	N/A

Consumers in the market for a new car should start their search for financing with car manufacturers. It is not rare to get low interest rates like 0, 0.9%, 1.9%, or 2.9% from car manufacturers.

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Trade-in

If you own your car outright, trade-in your car is simple: The trade-in value is deducted from the new car price. You pay the remaining amount for the new car with cash or with an auto loan. In downsizing case, if your trade-in is worth more than the new car, the dealership will give you a check for the balance.

If you still owe money on your trade-in, it will be a bit more complicated. If the trade-in is worth more than the remaining balance on your auto loan, the difference (the equity) is credited to the sale price of the new car. On the other hand, if your trade-in car is still in an auto loan and the car is worth less than you owe in the auto loan, you’ll have to pay this difference when you trade it in.

Don't expect much value when trading in you old cars to dealerships as credit towards car purchases. If you think you will have the time and patience, selling your old cars privately online or elsewhere, and using the funds for your car purchase tends to result in a more desirable outcome.

Some states will give you a nice little tax break when you trade in your old car. They do this by only taxing you on the Trade-Difference which is the balance after subtracting the amount you received after your trade-in. For example, your new car price is $35,000, and dealer value your trade-in old car at $8,000, then your taxable trade difference is $35,000 - $8,000 = $27,000. Your trade difference of $27,000 is the amount you will pay taxes on. Your trade-in will be taxed in the following states: California, District of Columbia, Hawaii, Kentucky, Maryland, Michigan, Montana and Virginia

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Fees

When buying a car, car dealers are experts with additional fees and charges. However, depending on the region you live in, there are legitimate state and regional fees required by law. These fees vary from state to state, some can be negotiated and some are your responsibility to pay.

Why these additional fees become such a controversial subject is because most car dealers will not bring them up until you are ready to sign the contract. You end up blind-sided with them towards the end of the car buying process. As a buyer, it's better to learn about all fees before the deal is final, than when you are in the finance and insurance office about to sign the contract.

The most common additional fees charged by car dealerships can basically broke down into three categories: sales tax, vehicle registration fees, and a documentation fee. Fees that fall within these categories are legit, legal, and are very difficult to negotiate with a dealership. What matters in the long run is the total cost to you, the total cost is the number you should focus on and negotiate and compare from different dealers.

The following is a list of common fees associated with car purchases in the US.

• Doc Fee or Documentation Fee: The charge is meant to cover the cost of office personnel doing the paperwork after the sale of a new or used car. Most dealerships charge anywhere from $50 to $500. Documentation fees vary from state-to-state and some states have a maximum limit a dealer is allowed to charge. The lowest average is $75 in New York, with the highest average being charged in Florida at $670.
• Vehicle Registration Fee: The amount the state charges to register a new car, this also covers title assignment and the cost of license plates.
After you've purchased the vehicle, the dealership saves you a trip to the Department of Motor Vehicles or Registry by providing this service for you.
• State and local sales tax: Most states in the US collect sales tax for auto purchases. It is possible to finance the cost of sales tax with the price of the car, depending on the state the car was purchased in. Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that don't charge sales tax.
• Advertising Fees: The regional dealer pays for promoting the manufacturer's automobile in the dealer's area. If not charged separately, advertising fees are included in the auto price. A typical price tag for this fee is a few hundred dollars.
• Destination Fee: A fee that covers the shipment of the vehicle from the plant to the dealer's office. This fee is usually between $400 and $1,200.
• Insurance: Auto insurance is mandatory in the US and is usually required before dealers can process paperwork. When a car is purchased via auto loan, full coverage insurance is mandatory. Most auto dealers can provide short-term (1 or 2 months) insurance for paper work processing so new car owners can deal with proper longer term insurance later.

The often called Out-The-Door Fee, abbreviated as "TT&L", is tax, title and license fee combined.