How to Figure Out Car Payments in Advance

It’s easy to get swept up in window-sticker prices when you’re walking around a car dealership full of shiny new and pre-owned vehicles. However, it’s important to note the actual amount you’ll end up paying will vary from the sticker price, once you factor in taxes, license fees, and interest on the loan.

Therefore, knowing how to figure out car payments in advance will help you find the right vehicle — and avoid discovering you’ve signed a contract for more than your budget can really handle.

What the Sticker Price Doesn’t Include

The sticker price only tells part of the story. According to U.S. News & World Report, here’s what that MSRP does not include:

  • Destination charge: How much it costs the maker to ship the vehicle from the factory to the dealership.
  • Sales tax: Just like any product, vehicles are subject to sales tax in most states. There can also be county- and city-imposed taxes as well. Some states charge upward of 11 percent.
  • Registration costs: These expenses accompany registering your car, getting the license plate, and getting the title.
  • Extra fees: The dealer may charge extra fees, like a documentation fee to draw up the documents needed to complete the transaction.

As you can see, the sticker price on the window is just the beginning; there are almost always extra expenses to factor in when you’re figuring out how much a car will really cost you.

Calculating Interest on Car Loans

Unless you’re in a position to buy a car outright in cash, which most drivers are not, you’ll need an auto loan. And, of course, the price of taking out a loan is paying interest. The interest rate for which you qualify will depend upon a few factors, particularly your credit history.

Here’s a sampling of interest rates based upon credit scores.

  • Super prime (781-850): 3.65 percent
  • Prime (661-780): 4.68 percent
  • Non-prime (601-660): 7.65 percent
  • Subprime (501600): 11.92 percent
  • Deep subprime (300500): 14.39 percent

Plugging different annual percentage rates (APR) into an auto loan calculator, will show you how this figure affects your monthly payments and the overall amount you’ll pay over the course of your loan.

One word of caution when it comes to interest rates: Although it may seem tempting to lengthen your loan so as to bring monthly payments down more comfortably into your budget, be aware you will end up paying more in interest to do so. This is why experts advise keeping loans to 60 months or less, rather than signing on for 72 or 84 months. Risks of taking on a longer-term auto loan include paying higher interest rates, paying interest for a longer period of time, your payments outlasting your car’s warranty, and a higher chance of going “upside-down” in the loan — or owing more than the actual value of your vehicle.

Figuring Out Car Payments in Advance: The Bottom Line

Empowered with the knowledge of all the expenses associated with buying a car, you can shop lenders before stepping into the dealership. You’re also in a better position to negotiate down the purchase price and try out various options with your budget to find the best fit.

Simply put, knowing how to figure out car payments in advance will help you find a car you like that you can comfortably afford. You’ll drive happier, with more confidence and long-term enjoyment. Plus, you’ll have cash left over with which you can do other things.


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