How Car Loan Payments Are Calculated
Financing a vehicle involves borrowing a principal amount to cover the purchase price of the automobile. Over the loan term, you pay back both the principal amount and annual interest charges assessed by the lender.
The Loan Payment Formula
M = P × [r(1 + r)^n] / [(1 + r)^n - 1]
Tips to Lower Your Auto Payment
- Make a 20% Down Payment: Putting down 20% on a new car minimizes interest charges and prevents negative equity.
- Shorten the Loan Term: 48-month or 60-month loans cost significantly less in overall interest than 72-month or 84-month terms.
- Shop Around for Pre-Approved Financing: Compare auto loan rates from local credit unions and online lenders before visiting the dealership.
