If you’ve shopped for a car online recently, you’ve probably noticed the “calculate my payment” or financial calculator options. Some folks are more mathematically inclined than others. These tools can help give you an estimate of payments and long term loan options that you could be dealing with. But to fully grasp how to budget and what you’re paying for, you need to know how the calculations truly work. So let’s take a look at how the financial calculator works.

What’s Being Calculated?

To break it down to basics, let’s just identify the terms being calculated. Some of the calculators will vary in what they ask for, but they all have the basics in common.

  • Car Price: the asking price (not necessarily the MSRP) of the car you hope to buy
  • Loan Rate (APR): the percentage of interest on the loan you are acquiring
  • Down Payment: how much you plan to put down in cash or trade in value upon purchase
  • Trade-In: how much the dealer is offering to purchase your current car from you

  • Note: the trade in value may be negative, meaning you owe more on your outstanding loan than what the dealer is offering you back. If this is the case, subtract the amount you are “underwater” from the down payment and enter the new number in your down payment and $0 for trade-in
  • Term Length: how long the monthly payments will last (usually 48, 60, or 72 months)

So, What’s the Answer Mean?

Most people would say that it’s pretty obvious that the calculated number is the monthly payment you would be responsible for. However, this number is more than just that. You can use the monthly payment to see just how much interest you are paying over the life of the term. The calculation is simple. Multiply the monthly payments by the number of months being paid, then subtract the down payment (if any) from the asking price. Find the difference of the two numbers. The remaining number is the amount of money you pay out in interest.

Taxes, title, licensing, and insurance are other costs that are not typically calculated into the payments. Since they are annual or single fees, they should be treated as separate, but be sure to budget them in accordingly.

Financial calculators can help put your car buying budget in perspective for you. They’ll calculate your payments, as well as the long term overall cost of the purchase. This can help you reach target negotiating prices and rates for when you make it to the dealership lot.

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