Interest Rates and Car

Car Loan

The first step in analyzing the car payment plan is to determine how much of the car is covered in the car loan. This means taking the price of the car, then adding the sales tax. This is the total cost of the car net of tax. Then, the downpayment is deducted. The downpayment is the upfront payment, and will not be counted in the car loan.

Used Car

Price

$ 21,000

$ 1,995

tax rate

Subtotal

$ 22,995

less DP

$ 2,500

Cost

$ 20,495

The total cost of the car is $22,995. The total amount that will be financed is $20,495. The next calculation will determine what the payments will cost over the life of the loan. This is the monthly payment multiplied by the number of months:

Financing

Monthly

$ 471.99

Term

48

Total

$ 22,655.52

So the total amount paid will be $22,655.52 for the loan. To find out the full price of the car, plus financing, simply add back the downpayment:

Total

$ 22,655.52

Add DP

$ 2,500.00

Total Cost of Car

$ 25,155.52

To calculate the finance charges, take the total cost of the monthly installments, and subtract from that the financed cost of the car:

Financing Cost

$ 22,655.52

Car Cost

$ 20,495

Interest Paid

$ 2,160.52

So the total financing cost of the car is $2,160,52. That is the interest paid, while the rest of the installment payments went for principle.

2. By paying cash, or by financing the vehicle over a shorter period of time, you pay less interest. If you pay cash up front, there are no interest charges. If you pay over a shorter period of time, and the rate is the same, then you will end up paying less, because you are paying more principal each time. The shorter time period is beneficial if the rate is the same, but if the rate is higher for a shorter loan, then the calculation should be run again to make sure that the shorter-term rate is actually better.

3. There are several advantages to having good credit when applying for a loan. First, you are more likely to get the loan. Second, you are more likely to get the loan from a reliable source, like a major bank. If you have bad credit, you might still get a loan, but from a less reputable lender.