With the average new car transaction price in the middle $30,000 range, fewer people than ever are paying cash for those purchases. And, truth be told, many experts advise against doing so even if it’s affordable for you. With that in mind, determining what you can afford ahead of time has become key to the car buying process.
It’s also how car loan calculators can help you get the best deals.
Determining What You Can Afford
One of the biggest advantages of using car loan calculators is the ability to determine what the monthly payment will be ahead of time. This way, you can see right away how readily the car you have in mind will fit into your budget. Once you’ve compared your current expenses to your income, you’ll have a good idea of what you can afford to pay each month. The next step is figuring out how to get the car you want at the payment you can afford — without taking on more debt or risk than you should.
How to Use a Calculator
There are several key pieces of information you’ll need to feed the calculator to make the most accurate determination. In most cases, a car loan payment calculator will ask you to enter the amount of the purchase price of the car you’re considering, the amount of the down payment you have, the trade-in value of your current car (if you have one), the length of the loan you’d like to carry and the interest rate for which you qualify. The average monthly payment at which you’d be looking can be derived from considering this information.
• Down Payment: Generally speaking, you’ll want to have at least 20 percent of the purchase price on hand to use as a down payment. This can be both in cash and the value of your trade-in. Coming in as close to 20 percent as you can will help you ensure the loan you get won’t exceed the value of the car when the interest is factored in. This could become a serious issue if you need to sell the car before the loan is satisfied, or if the car is stolen or declared a total loss after an accident.
• Loan Term: The longer you stretch out the repayment of a loan, the lower your monthly payments will be. However, you’ll also pay more for the car in total because you’ll give interest more time to accrue. A car loan payment calculator can help you see how many months you’ll need your loan to run to make the monthly payment fit into your budget. Keep in mind though; you’re looking at more car than you can afford to buy if you have to go longer than 60 months to get down to a payment you can handle. Doing so can also introduce the risk of owing more than the car’s worth.
• Interest Rate: Your first move when you’re thinking of financing a car or any other costly item should be to review your credit report. You can acquire a copy of each of your three reports (from Experian, Equifax and Transunion) for free at AnnualCreditReport.com. Review them for errors and initiate corrective actions for any errors you might find.
Once things are cleared up, you can be assured your credit score is the best it can be. Your bank or credit union will usually provide you credit score information for free — or at a minimal charge. This is crucial because a higher credit score entitles you to a lower interest rate. Knowing all of this in advance will get you the most accurate payment estimate.
In short, car loan calculators can help you get the best deals by showing you exactly what you’re working with, which in turn gives you the capability of negotiating from an informed position. Knowing exactly what you can afford, the interest rate to which you’re entitled and the number of months you’ll need to finance the deal positions you to negotiate a much better transaction for yourself.