What to consider before taking out a car loan
New vs. used car
When buying a car, you’ll need to decide whether to get a new or used vehicle. This can play a role in what financing options are available to you and how much of an auto loan you’ll need to take out.
A new car purchase generally comes with better and more convenient financing options. Used cars, on the other hand, tend to cost less.
Leasing vs. buying a car
Another factor to consider when shopping for a new vehicle is whether you want to buy or lease a car. Instead of owning your car at the end of your auto loan, leasing a car requires that you make monthly loan payments for a predetermined amount of time. Once that time is up, you’ll have to return the car.
Some lenders offer car lease buyouts, which extend the option to purchase your car, typically at the end of your lease. However, you may have the option to buy your car earlier in the lease, too.
Getting preapproved for a car loan
Shopping around and getting preapproved car loans from banks, credit unions and/or online lenders can give you an advantage during the vehicle financing process. Be sure to get preapproved with at least three lenders so you can compare car loan rates, terms and borrowing amounts.
Preapproval requires a hard credit pull — which can bring your credit score down by a few points —- but is a firm offer from a lender. Once you close on your loan, your APR will be similar, if not the same, as your preapproved rate. You can use these offers to negotiate with lenders.
Trading in your car
If you currently own a vehicle, you can trade in your car and put its value toward your car payment. You can determine your car’s worth by using online resources such as Kelley Blue Book (KBB), National Automobile Dealers Association (NADA) or Edmunds.
However, you may make more money if you sell your car privately through a site like Craigslist.
Vehicle rebates
A vehicle rebate is a discount some auto manufacturers offer on new cars. Car rebates can include cash discounts, low auto loan rates and special lease deals. For instance, some auto companies, like Toyota, offer 0% APR car deals.
Car loan fees
As with many forms of credit, you may have to pay some car loan fees when you buy your new vehicle. Some common types of fees include registration and title fees, administrative fees and destination charges (if you have the vehicle shipped). Keep in mind these dealer fees to avoid buying a car since they can unnecessarily add to the total cost of your bill.
Car loan taxes
When you buy a car, you’ll need to pay local and state taxes on your purchase. The most common tax that comes with a car loan is a sales tax. Some states, such as Oregon, don’t charge a sales tax or levy local sales taxes. Other states, such as California, charge sales tax as high as 7.25%.
In some instances, buying a car is tax-deductible. For instance, when you file your taxes, you may be able to deduct the sales tax you paid on your car.
FAQs
To calculate your monthly car loan payment by hand, divide the total loan and interest amount by the loan term (the number of months you have to repay the loan).
How much would a monthly payment be on a $25,000 car loan? ›
Example: A six year fixed-rate loan for a $25,000 new car, with 20% down, requires a $20,000 loan. Based on a simple interest rate of 3.4% and a loan fee of $200, this loan would have 72 monthly payments of $310.54 each and an annual percentage rate (APR) of 3.74%.
How much is the monthly payment on a $20000 car loan? ›
For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.
How much would a $30,000 car payment be? ›
Calculator Results
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 6 year term will have a monthly payment of $483. In total, the loan will cost $34,787 with $4,787 in interest.
How do I calculate my monthly loan payment? ›
The formula is: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1], where M is the monthly payment, P is the loan amount, i is the interest rate (divided by 12) and n is the number of monthly payments.
What is the formula for calculating monthly loans? ›
For example, If a person avails a loan of ₹10,00,000 at an annual interest rate of 7.2% for a tenure of 120 months (10 years), then his EMI will be calculated as under: EMI= ₹10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 - 1) = ₹11,714. Calculating the EMI manually using the formula can be tedious.
How much is a $20,000 loan for 5 years? ›
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| Loan Amount | Loan Term (Years) | Estimated Fixed Monthly Payment* |
|---|
| $20,000 | 5 | $415.07 |
| $25,000 | 3 | $771.81 |
| $25,000 | 5 | $514.57 |
| $30,000 | 3 | $926.18 |
13 more rowsIn general, you'll need a FICO credit score of at least 600 to qualify for a traditional auto loan.
How much is a payment on a $15,000 car loan? ›
As most borrow money from banks quite often, they already take care of that by default. On average, they get an APR of 2.89%, which obliges them to pay the following amounts monthly on a $15,000 loan: 12 months. $1269.25.
What happens if I pay an extra $100 a month on my car loan? ›
Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.
In today's market of inflated car prices and payments, the average monthly new-car payment has surpassed $700, according to the vehicle affordability index provided by analytics companies Cox Automotive and Moody's Analytics.
What is a good APR for a car? ›
Car Loan APRs by Credit Score
Excellent (750 - 850): 2.96 percent for new, 3.68 percent for used. Good (700 - 749): 4.03 percent for new, 5.53 percent for used. Fair (650 - 699): 6.75 percent for new, 10.33 percent for used. Poor (450 - 649): 12.84 percent for new, 20.43 percent for used.
What is the formula for monthly installment payment? ›
The equation to find the monthly payment for an installment loan is called the Equal Monthly Installment (EMI) formula. It is defined by the equation Monthly Payment = P (r(1+r)^n)/((1+r)^n-1). The other methods listed also use EMI to calculate the monthly payment.
How much is the monthly payment on a $35000 car loan for 72 months? ›
If you take out a $35,000 new auto loan for a 72-month term at 4.0% interest, then your monthly payment will be $547.58. Although your monthly payments won't change during the term of your loan, the amount applied to principal versus interest will vary based on the amortization schedule.
How do you calculate equal monthly payments on a loan? ›
The EMI amount is calculated by adding the total principal of the loan and the total interest on the principal together, then dividing the sum by the number of EMI payments, which is the number of months during the loan term.
How much should my monthly car payment be based on my salary? ›
In general, it's recommended to spend no more than 10% to 15% of your monthly take-home income on your car payment, and no more than 20% on your total vehicle expenses, including insurance and registration. Read on to learn how you can determine how much car you can afford based on your financial situation.
