When you buy a vehicle, your monthly car loan payment is based on a number of factors. The only person who can tell you for sure what it's going to be is a lender.
What Goes into a Monthly Car Loan Payment?
There are several factors that go into determining just what your monthly payments are going to be. The main factors that determine the amount of your monthly payments for a car loan are:
- Total sales price of the car – This is the most obvious influencer of a monthly car payment. In addition to the negotiated sales price of the vehicle, be sure to include all things that show up in the final purchase price such as tax, title, dealer, and license fees.
- Down payment amount – Down payments can be one of the biggest assets you have when financing a vehicle. Placing money down upfront reduces the amount you borrow, and can lower the amount of time your car spends with negative equity. Down payments can be cash, trade-in equity, or a combination of both. It’s almost always a good idea to put the most down that you can.
- Number of months financing – The length of your loan plays a big part in determining how much money you pay per month. Longer loans have smaller monthly payment amounts, but this can be deceiving, because stretching out a loan causes you to pay more in interest charges over the term of your loan.
- Interest rate – Interest rates vary, and each person’s interest rate is based on their credit score and a few other factors. The higher your interest rate, the more it costs you to borrow money, which results in you paying more in interest charges over time.
To see an example of what your monthly payments could look like, you can use online tools like the Auto Credit Express car loan payment calculator. You can enter estimated amounts and see what your monthly payments might look like.
What’s Reasonable for a Monthly Payment?
Knowing what the size of your monthly car payments might look like is only half the battle. Even if you find a payment amount that you think you can handle, you won’t know for sure unless you know how that payment fits into your budget.
Believe it or not, lenders want you to be able to afford your car loan and insurance payments, and they don’t want you to go broke doing it. So, they use two special calculations to ensure that the combined cost of your auto loan and car insurance fits comfortably within your budget.
Lenders use the debt to income (DTI) and payment to income (PTI) ratios. DTI is designed to see if you have enough disposable income to afford another monthly payment. PTI tells them how much of your monthly income is needed for that payment.
To calculate DTI, add up all your monthly bills, including estimated car loan and insurance amounts, and divide the total by your monthly income before taxes. The resulting decimal can be turned into a percentage, and lenders want it to be below 50 percent.
In addition, lenders don’t want your combined auto loan and car insurance payments to take up more than 15 to 20 percent of your monthly income. To find out what your ideal payment range is, multiply your pre-tax monthly income by 0.15 and by 0.20. These numbers form your maximum monthly price range for a car loan payment.
Start Here for Your Next Car Loan
If you’re looking for your next car, be sure you know your budget before you get to the dealership. Also, keep in mind the overall price. Shopping only for a monthly payment could end up costing you more in the long run, due to increased interest charges over a too-long loan term.
If you know your ideal monthly payment price range, but don’t know where to start your search, let Drivers Lane help. We work with dealerships all across the country that are able to work with people in many types of credit situations, such as bad credit, no credit, and even bankruptcy. So don’t delay, fill out our online auto loan request form to get started today!