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Have you been saving up to buy a new car? Unless you’ve saved for a while, you’ll probably need financing to help you cover the costs of your new set of wheels. Auto loans are a helpful financial product for those wanting to pay off their car over a period of time. Though they make buying a car convenient, it is still possible to overestimate what you can afford. Large car payments that are hard to make can leave you financially stressed every month, or worse, without a car if you default.

To help you better analyze how much car you can afford, Amplify Credit Union created the auto loan calculator. This tool will show you how big of a loan you can afford to take out and at what interest rate. For more information on how to fill out the calculator, refer to the information below the tool.

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Vehicle Purchase Price

Purchase price is the negotiated price of the automobile, used in both leases and purchase options as the basic price you agree to pay. The purchase price may not be the same number as the manufacturer’s suggested retail price.

Cash Rebate or Cash Back

Some dealers offer cash back or rebates for purchasing a vehicle. Make sure to understand all the fine print of any rebate or cash back incentive you sign up for.

Sales Tax Rate

Sales tax is governed on the state and local level, so what you put here will be based on where you live. 45 states and the District of Columbia have statewide sales taxes and 38 states have areas with local sales tax. These taxes are imposed on the sale of goods and services and are levied at the point of sale.

Value of Your Trade-In

Trading in a car? The value will count toward your overall purchase price! But beware—what you think the value of your car is and what the dealer will actually give you for it are two different things. Be sure to get—in writing—how much they value your trade-in.

Amount Owed on Trade-In

Do you have an outstanding loan balance on the car you’re trading in? You’ll need to account for that here, as it will be subtracted from the overall trade-in value. When you trade your car into the dealer, they will pay the loan off.

If your car is worth less than the amount remaining on the loan, you should be extra cautious when trading in your car. The dealer might suggest you roll the negative equity into your next car loan, but this means you will begin your new loan already upside-down—meaning you will owe more than your asset is worth.

Loan Term (months)

Every loan or lease has a set term, or period of time, during which you’re supposed to pay off the loan. You can find auto loans with terms anywhere between 24 months and 84 months, or two to four years. In 2020, the average loan term for a new car was 70.6 months, which is nearly six years. The most common loan term is six years, with seven-year loan terms following close behind.

Your term affects how large your car payments will be, as well as how much you will ultimately pay. With a shorter loan term, you’ll have larger monthly payments but pay off the loan quicker. If you have a longer loan term, your monthly payments will be smaller. However, if your interest compounds, you’ll pay more overall due to more interest payments.

Interest Rate

The loan rate, also called the interest rate, is what a lender charges in exchange for you being able to borrow the funds. With auto loans, the rate is fixed, meaning it doesn’t change over time. It’s calculated as a percentage of your total loan amount and is added to the principal balance of the loan.

There are two types of interest that you’ll see with auto loans: simple interest and compounding interest. With simple interest, you’ll just pay a certain percentage of the loan principal. With compounding interest, on the other hand, your monthly interest payments will be based on the principal and the interest that has already accumulated.

Your interest rate is set by the bank but can vary depending on several factors. Generally, the higher the risk that your loan poses to a lender, the higher your interest rate will be. Things that can affect the rate you get include:

  • Your credit score: This three-digit number tells lenders about your creditworthiness. It is based on your credit report, which is information sourced from the three major credit bureaus. Auto loans tend to be more lenient on credit score requirements for approval since the note is backed back collateral. However, it can still have a major impact on the rate you receive.
  • Employment history and income: A lender wants to know that you make enough each month to make the monthly payment. Those who are a salaried employee may have an easier time getting a car loan than someone with variable income, like freelancers.
  • The loan term: Loans with longer terms may have higher interest rates.
  • The loan amount: The more money you are borrowing, the greater the risk for the lender. Because of this, larger loans may pack a higher interest rate.

Down Payment

A down payment is money that you pay upfront when buying something on credit. A dealer may have a required down payment, but buyers will sometimes pay more if they have the money on hand. Typically, experts recommend putting down at least 20% of the purchase price. Remember, the more you put down, the less your monthly payments will ultimately be.

Fit Your Car Payment into Your Budget

The most important factor in all of this is simple: does it fit into your budget? Whether you’re not sure where to start with your budget or you’re looking for tips to level up your skillset, you can check out our blog posts on Money Management for more helpful articles! We want to provide you the kind of financial advice you need to accomplish your goals.

Interested in learning about auto loans?

When it comes to auto loans, let Amplify help put you on the right path.

Learn about Auto Loans