How to Calculate a Car Loan

A car loan is a type of secured loan whereby the borrower pledges the car as collateral for the loan. Many factors go into calculating a car loan including loan amount, interest rate, and length of the car loan.

Before learning how to calculate a car loan, the car buyer must first understand the process of amortization.

Car Loans: Amortization

Amortization means the paying off of a debt over a specified time period. In the case of a car loan, it means the overall process of paying the lender on a monthly basis with the goal of paying off the car at the end of the loan term.

From a technical financial perspective, the car buyer mainly pays the interest on the car loan at the beginning of the loan. But as time progresses, the car buyer increasingly pays down the principal until the entire car loan amount is paid off.

Car Loans: Calculation Factors

Factors that go into calculating a car loan include interest rate, loan amount, and length of the car loan.

Car loan length depends on a variety of factors. If the car buyer can afford higher payments and plans to trade in the car after 3-4 years, a 36-month car loan may be worthwhile. A majority of people choose a 48-month car loan, while some who plan to keep the car for 8-10 years and need lower monthly payments opt for a 60- or even 72-month car loan.

If the car buyer plans to trade in his or her car and use the dealership's trade-in offer as a down payment on the new car, it can lower the cost of monthly payments. Whatever the case may be, a down payment somewhere in the range of $2,000 to $4,000 is standard for the average priced car.

Car Loans: Calculating the Car Loan

Car buyers can search the web for amortization calculators to estimate their price point for a car purchase. For example, About.com features an amortization calculator for car loans.

The fist item to consider is the loan amount. The loan amount is the price of the new car minus down payment and trade in.

For example, the car buyer wishes to purchase a car with a price of $18,000. The car buyer will pay a $2,000 for the down payment and receive another $2,000 for the trade-in. The total loan amount would be reduced to $14,000.

Next is the interest rate, a figure that changes often. The key here is to change the percentage into a decimal number (e.g., 6.25 percent = .0625). Beyond the interest rate, the car buyer must plug in the estimated length of the car loan in years.

The last step is to enter the start date of the loan and run the calculation to display the amortization schedule and to determine monthly payments.

In summary, the car buyer must consider the car price minus down payment and trade in, interest rate, and estimated length of car loan in order to calculate the monthly cost of payments. A simple web search on amortization calculators will provide the tools necessary to calculate the car loan quickly and easily.