Financial experts always recommend figuring out what you can afford to pay for a car each month — before buying one. This, of course, will help you ensure the car you buy fits comfortably into your monthly budget. So, you’ll need to determine how much the monthly payment will be on any car in which you’re interested. After all, what’s the good of knowing what you can afford if you have no idea of what things cost?
To that end, let’s take a look at the factors determining your car payment.
The Purchase Price
The price of a new car is negotiable in most cases. This means the price on the sticker is seldom the price you’ll pay. Instead, the purchase price will be determined by what you’re capable of negotiating.
And yes, that can make predicting a monthly payment somewhat inexact. However, you can get an idea of what other people in your area paid for a car at sites like KBB.com. As you’re reviewing the data, it’s always better to base your estimate on the high side than going with the lowest estimates these sites provide. That way, you’ll be pleasantly surprised if you get a better price and you’ll be ready to deal with it if you aren’t.
Down Payment & Loan Amount
The next factor to consider will be how much cash you have for a down payment. The more cash you pump into the deal, the lower your car loan amount will be. At a minimum, though, you should aim for 20 percent of the purchase price. You might encounter a higher interest rate if your down payment is less than 20 percent (more on that later).
Let’s say you negotiate a purchase price of $35,000 and you have a 20 percent down payment. This will leave you a loan balance of $28,000 when your $7,000 down payment is applied. If you have more to put down, the balance will be lower and so will the payment. If you have less, the amount you borrow will be higher and your payment too.
Credit Score & Interest Rate
As we touched upon briefly above, you’ll repay more than those $28,000 when you finance the purchase. After all, the lender is going to want to earn a profit in exchange for investing their capital into helping you get the car. This profit is called interest and the amount you’ll encounter will be based upon your credit history and the credit score it dictates.
This means you’ll need to get copies of your credit report, which you can acquire for free at AnnualCreditReport.com. The big three credit reporting agencies make these available on an annual basis. If you have yet to start doing so, you should get one every four months. Because you’re entitled to a free one from each of the three companies every year, you can review your report on a quarterly basis if you ask for them one at a time every four months.
Your bank or credit union can help you learn your credit score — albeit for a small fee. The higher your credit score, the lower the interest rate you’ll command because lenders will consider you less of a risk.
US News & World Report cites the following rates for February of 2020:
|Credit Score||New Car Loan|
|700 – 749||3.27%|
|650 – 699||7.15%|
|450 – 649||12.07%|
|449 or less||14.74%|
Source: U.S. News and World Report, Feb 2020
Length of the Loan
The other factor that comes into play here is the amount of time you’ll require to repay the loan. In most cases, the longer the term, the lower the monthly payment. However, longer terms mean more interest payments, which make the total cost higher.
Once you have a handle on the factors determining your car payment, plugging them into a payment calculator will help you get a good idea of much you can expect to pay each month.
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