Managing Your Car Loan Payments

The amount of monthly car loan payments is a result of several factors all of which you can control to some degree: purchase price, down payment, interest rate and loan terms. The following information will explain how each of these affects your monthly car loan payment and what you can do to manage it.

Where to Begin

To be in control of car loan payments, begin with what you can afford. Look at your gross income. About 36 percent of that going to all your debt - including home, car and credit card - is what lenders say is safe. Find a car payment amount that you can comfortably pay each month and look the car and loan terms that gets you there.

Purchase Price

The purchase price of your vehicle is among the most important factors in determining monthly car loan payments. The more expensive your car the more your monthly payment will be (although you can affect this with down payment and loan terms, as will be explained below). If you assume a 36-month auto loan, a $36,000 car will cost $1,000 a month before interest and fees. An $18,000 car will cost $500 a month. 

Down Payment

You can manage the effect of the vehicle’s price with your down payment. A 20 percent down payment is preferred by most lenders, although many dealers offer “zero down” specials to get you to buy. In the above example, 20 percent down on a $36,000 car - or $7,200 - lowers monthly car loan payments to $800 (20 percent) before interest or fees. Often, the zero down deal is good to get you in the car but a poor choice if you are unable to comfortably pay the auto loan payment.

Loan Terms

The length of your loan can help you manage car loan payments as well. Again, in the example above, a 48-month loan on a $36,000 vehicle drops your monthly payment to $750 before interest and fees. But remember, because of interest, you will be paying a larger total amount. This can be a good strategy if the monthly payment is more important to you than getting out of debt as quickly and as cheaply as possible.

Be aware that the longer your auto loan is past 36 months, the higher your interest rate will be as lenders see their money at greater risk longer on a depreciating asset.

Interest Rate

Your interest rate is in your control to some extent as well. If your credit history and score are good, you can earn a lower rate. The larger your down payment, the better secured your loan is and the better rate you can earn. As above, the length of the loan can affect the rate.

It is important to ascertain the annual percentage rate of your loan or APR, which must be included in your loan documents. It is an “apples to apples” comparison of your real interest rate after any specials and includes the annual compound rate and fees Be wary of initial low-interest loans that jump to a higher rate. Check the APR to ensure you really are getting your best rate.

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