Learn How to Calculate Auto Loan Monthly Payment
Understanding car finance and car loan interest rates in Canada can go a long way towards getting a good deal.
A new or used vehicle purchase is not as simple as just writing a check and driving off in a new car. At least, not for most people. Even the very wealthy often finance vehicle purchases as a way to build credit, keep liquid cash on hand, and flex financial muscle. In today's economic climate, our personal credit is as important to our bottom line and net worth as is our bank balance and asset ownership.
Things to Consider when Calculating Your Loan Payments
Calculating a car finance loan is relatively simple but requires some knowledge of the terminology being used and the factors included in the loan and repayment process. Typically, the loan will involve:
- Purchase price of the vehicle
- Taxes, registration fees, and other government-required overhead costs
- Dealership fees (paperwork, handling, shipping, etc)
- Trade-in vehicle value (if any)
- Down payment (if any)
- Rebates and incentives for the purchase
- Interest rate
What can you do to reduce your monthly car loan payments?
There may be other things included, such as a payoff for a current loan on your trade-in. For most buyers, the above list covers most of what is likely to be on an automotive loan. The buyer has control over the potential purchase price of the vehicle, via negotiation, the trade-in value of a current vehicle (again, negotiation), the amount of the down payment, and potentially over the interest rate to be charged. The other values, such as the required government fees, dealership fees, and rebates or incentives are generally out of the buyer's control. The first three items on our list all add to the principal (total loan value) while the next three deduct from it. The final item determines the total cost of the loan to the buyer.
The total to be loaned to the buyer, meaning the total amount of the purchase including any fees and minus any deductions such as trade-in value and down payment, is the principal for the loan. The lower the principal of the loan, the lower the interest rate and payments will be.
For example, a car that costs $25,000 (negotiated final price) and has $1,800 in fees has a cost of $26,800. The buyer has no trade-in but has $4,000 as a down payment and the manufacturer is offering $1,000 in down payment matching for a total down payment of $5,000. The car finance loan is now for $21,800 on a car whose current value is $25,000. The buyer has very good credit, so the car loan interest rate in Canada will be at 6 percent annually thanks to all of these factors. From there, the monthly payment can be calculated.
The general formula for loan amortization in car finance loans is:
A = P * (r(1+r)n) / ((1+r)n -1)
- A is the monthly payment.
- P is the principal of the loan (total to be financed).
- r is the interest rate per month (annual interest rate divided by 12).
- n is the total number of months in the loan.
Using our example above, and this formula, we can see that at 6 percent annually on a 54-month loan, the buyer's monthly payment will be $461.66. Total interest to be paid over the life of the loan is $3,129.40.
Many auto finance offers in Canada will include a bi-weekly or even weekly payment option, which often further reduces interest paid because the more frequent payments more quickly whittle down the principal owed, reducing interest costs. In the above scenario, a bi-weekly payment of $212.82 would reduce interest by almost $30 while a weekly $106.36 payment would reduce it by nearly $800 over the life of the car finance loan.