Your guide to car loan financing.
Buying a vehicle often seems like a complicated process, considering what goes into calculating the cost of a new car purchase. However, it is something you need to do so that you can budget properly and ensure you know exactly what kind of ride you can afford. Just as it is important to be wary of terms like "sale of the century" and "below invoice," you need to ensure that you don't end up spending way more in the long run on high interest and long payment periods.
Just as you should never count your chickens before they hatch, so, too, should you not be drawn in by silver-tongued salespeople and financial providers who want to take advantage of you. By arming yourself with the correct information and working out a few things for yourself beforehand, you can go into a negotiation with a stronger position. We all need to pay our dues, but with a little savvy, you can send the piper off with a lot less than he was hoping for.
Choosing to buy a new car is thrilling, provided you have the budget to cover whatever your heart desires. Whether you are perusing compact cars, or looking at alternatively-powered cars like the newest EV models, you can read our guide on choosing the perfect vehicle here if you are feeling overwhelmed. The next most important thing you need to know is how much money you really have to put down on a new car. This does not mean the price on the sticker or what you may see displayed on a pop-up advertisement online. In most cases, these are base MSRP figures and do not take into account handling fees, taxes, registration fees, and the like. And naturally, you will need car insurance, too. To calculate the true price of a new car, you need to know exactly what each of these factors add to the bill and, if you're lucky, what incentives might be subtracted.
Destination charges are generally standard, too, with various brands adding their own figures to the total cost. Tax is a whole other story as this will depend on what state you're in, for starters, and a bunch of other factors, too. To learn how to calculate new car tax, read our article on it here. Then you have your licensing fees and registration. No matter how much you haggle with the dealer, these fees cannot be lowered, so know beforehand what you will have to pay for each. As for car insurance, you'll have to research what each company is offering to figure out what a fair price for car insurance is. Armed with all this knowledge, you should be able to estimate what the final figure will be.
Another thing to keep in mind during your negotiations will be the trade-in value of your vehicle. To work this out, you take the MSRP of your car and then calculate the depreciation based on age, condition, and mileage, while also accounting for any extras you added. Different types of cars have more or less market demand, which affects the expected pricing, too. Getting your car evaluated for its worth is the most reliable way to know exactly how much of a discount you are likely to get when you trade it in. We explore this more in detail, too.
Finally, you need to account for your monthly insurance tariff. There is no shortage of providers in the USA, so be sure to shop around and get quotes to leverage against one another for the best deals. To calculate new car insurance prices, you need only go to the relevant provider's sites and enter the value of the vehicle into their calculators. However, keep in mind that this will only give you an estimate, and other factors, such as your age and risk profile, will also contribute towards the final cost.
Naturally, you're going to hear a lot of words thrown around when talking to your bank or lending institution about financing. Often, these are trade words that can seem confusing at first. You definitely wouldn't want to be a bunny (aka someone who negotiates poorly), so here are some terms you need to understand when you want to calculate your new car loan payment:
The consumer financial protection bureau (CFPB) provides interested parties with a handy worksheet that makes calculating all this a little easier, too.
Now that you know the terminology a bit better, you can calculate new car loan payments with interest and trade-in value taken into account. Using an online calculator is the fastest way to estimate the final cost of your vehicle. There are two different calculations involved, depending on exactly what you want to know.
As you can see, the overall duration of your loan can severely impact your final price. This is why you benefit from a larger down payment and a shorter repayment period. It may hurt your pocket a bit now, but you'll be thankful in the long run. However, if you really can't afford this, and find yourself being forced into a particularly long-term payment plan, you should make sure you look into GAP insurance. This helps to ensure that you won't find yourself still paying off your old car in the event that it is totaled in an accident, since your long payment plan means you may actually have to spend more than the car is actually worth, which is all that normal insurance covers.
Keep in mind that this only covers buying a new car. There are significant differences when you buy a car vs lease it. Many shoppers see leasing as a cheaper option, but there are advantages and disadvantages to each. With a higher down payment, you could end up spending less on a lease than you would on a purchase. You should calculate the cost of a car lease in comparison with buying to determine which route will save you the most money. Naturally, as we move further into 2021, you should be keeping your eyes peeled for sales and other potential deals.
If you are buying with cash, you need only add the retail cost of the car to the registration and license fee, tax, and delivery charges. However, if you are financing, the final cost at the end of your payment term is calculated using I = P x R x T. This means price with interest equals principal loan amount multiplied by the interest rate and term/period of the loan.
The exact figure will depend on your overall income and list of expenses. Also keep in mind, that the more expensive the car, the higher the insurance premium will be. When all is said and done, you want to keep the total cost of your car to between 15% to 20% of your monthly income.
A number of reviews in the US show that the average person spends around $565 for minimal insurance and $1,674 for full coverage, per year. However, your age, the risk rating, how well you drive, and the total value of your car all factor into this equation, so your insurance invoice could vary accordingly.
The fastest way to do this is to simply ask your lender. They are required, by law, to tell you the APR of your loan. Alternatively, you could use a car loan APR calculator by punching in your monthly payment amount, the length of the loan, and the total loan amount. This will give you a percentage figure. Naturally, the lower the figure, the less you will be paying overall all.