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Car Math

Posted on 24 August 2008

Even if you failed algebra in high school, don’t worry. There are no unknown variables here, and we’ve even provided you with a handy calculator to help you determine your monthly car payments.

To estimate how much you’re going to owe per month on your new car, take several factors into consideration: the total price of the vehicle, the sales tax in your state, the amount of your down payment, the interest rate of your financing options, and the duration of your financing plan. (Financing can be arranged either through the dealer or through a separate lending agency).

For example, if you decide to purchase a $20,000 car with no down payment, a state sales tax of 5% and a 9.05% interest rate, and pay it off in four years, your monthly payment will be about $525. (Check out our loan calculator to figure out how much you’d have to pay for the car of your choice). Based on your estimated monthly payment, ask yourself if you can budget this successfully given your current income and still afford gas and monthly insurance payments (not to mention rent).

It seems like a lot to consider when all you want to do is to ride your new car out of the dealer’s parking lot. However, if you keep these key terms in mind, you won’t be caught by surprise when it’s time to negotiate the payment terms on your new car:

  • The total price of the car. This is the negotiated price of your vehicle plus tax, minus any dealer’s rebates. This isn’t the total amount you ultimately pay for your vehicle; however, it is the base from which dealers calculate the tax and interest rate on a car.
  • Down payment. In essence, the down payment is a portion of the total price of the car that the buyer “puts down” in order to be able to drive the car away from the dealership. Traditionally, by laying down a significant amount of money, you signify your intent to continue paying for the vehicle; however, “money down” isn’t always necessary. Remember, while putting no money down might be advantageous in the short-term, it will increase your monthly payments in the long-term.
  • Interest Rate. This is one of the most important numbers you’ll have to deal with when financing a car, so pay attention. Basically, this is the price the lender charges for making you a loan. For each year of your term, you are charged on the remaining amount that you owe. This means that you’re charged interest yearly, but pay it on a monthly basis. Interest rates vary by state and sometimes by city. The national average is about 9%; however, rates can range up to about 13%. These make a huge difference in what you owe: take a look at our example above. Given the terms stated, you’d end up paying just over $5,000 in interest. If the interest rate were 13%, the total would rise to almost $7000. Make sure the interest rate is one you can afford comfortably.
  • Term. This refers to the duration of your financing plan. Generally, you can pay your car off in monthly installments for either 24 or 48 months, although this period is negotiable with the dealer. This number is closely tied to the interest rate because the longer you take to pay off the car, the more you’ll be paying in interest. The quicker you pay off the car, the less extra money you’ll shell out in interest.

Keep these basis concepts in mind, and you can walk into the dealership confident in your knowledge of all things finance – and start worrying about different kinds of car math, like how many bags you can fit in your trunk for a weekend trip to your summer share.

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1 Comments For This Post

  1. Cheap Auto Insurance says:

    Thanks for sharing those great information in buying a new car. And always remember that a new car always comes up with an auto insurance. So, don’t forget to buy one.

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