Whether you're buying or leasing a vehicle, it's essential to choose a model you can comfortably afford. If you opt for something beyond your financial means, you may struggle to make your car payments on time. This can cause you to be delinquent on your auto loan, which can lead to severe consequences. As such, you should carefully calculate your monthly car payment before you hit the dealership. This can help you determine how much car you can afford and properly plan your future finances. Check out this comprehensive guide to learn how to use a car payment calculator.

* These calculations are for reference purposes only. All figures are estimates only and are not guaranteed as accurate. Always consult a professional financial advisor.

What Is a Car Payment Calculator?


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Basically, a car loan payment calculator is an online tool that provides an estimate of your monthly auto loan payment based on a number of inputs from you. The details you need to input may differ from one calculator to another, but they generally include the following:

  • Vehicle cost: This is the price of the new or used vehicle you intend to buy.

  • Down payment: A down payment is an upfront partial payment you make toward your car purchase. The larger your down payment, the lower your monthly payment. 

  • Loan term: The loan term is the amount of time you have to fully repay your auto loan. If you opt for a long term, you'll get a smaller monthly payment, but you'll pay more interest over the course of the loan.

  • Interest rate: The interest rate is the cost of borrowing money from your loan provider, which is expressed as a percentage of the loan amount. 

After you've entered these details, the payment calculator will show you how much you need to pay each month throughout the duration of your car loan. Some calculators may give you additional information, such as the total loan amount and the total interest to be paid. 

A car lease calculator requires you to provide the same inputs as a car loan calculator, plus the residual value of the vehicle. When you lease a car, you're essentially paying for its depreciation. The residual value is an estimate of how much the car will be worth at the end of the lease, which is also the amount you need to pay if you decide to purchase it. After you've filled out all the required fields, the calculator will provide an estimate of your monthly lease payment. 

How Much Should You Spend on a Car?


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Now that you know how a car payment calculator works, you can use it to find out what kind of car you can afford. Choosing a vehicle within your budget can help you save substantially over the long run and avoid overstraining yourself financially. Below are the key steps to determining the right budget for your next car:

Calculate the Monthly Car Payment You Can Afford

According to financial experts, you should avoid spending more than 10% of your net income on your monthly car loan payment. Therefore, if your take-home pay is $3,000, the amount of car payment you can afford is $300. 

When you're budgeting your car payment, you should be realistic about how long you're able to keep meeting this financial obligation on a monthly basis. It's recommended that you get a five-year loan for a new vehicle or a three-year loan for a used one. You should think twice about choosing an overly long loan term because it increases your risk of being upside down on your loan. Having an upside-down car loan means the amount you owe is higher than the market value of your vehicle. 

Another thing you should consider is that your monthly car payment isn't your only auto-related expense. You also have to pay for expenses, such as gas, parking, tolls, insurance, maintenance, and repairs. Experts suggest that you keep your monthly car ownership cost below 15% to 20% of your net income. For instance, if your after-tax pay is $3,000, you have to set aside $300 for your car payment and $150 to $300 for other automotive expenses. 

The same applies if you're leasing a vehicle. However, it's recommended that you opt for a three-year lease. This will ensure you'll have warranty coverage throughout the duration of your lease, meaning you'll save on repairs. Similar to a car loan, a longer lease comes with a lower monthly payment, but it increases the total amount of interest you need to pay. 

Know the Factors That Affect Your Car Payment

It's important to have a clear understanding of how a dealership calculates your car payment. This can help you avoid the costly mistake of focusing only on the price of the vehicle and ignoring the overall cost of your auto loan

A dealer takes several factors into consideration when working out your monthly payment, including the loan amount, duration of the loan, and annual percentage rate (APR). The interest rate you'll be paying is included in the APR, and it varies depending on your loan term, credit score, and other factors. Note that your loan term and interest rate can have a significant impact on your car payment. The overall cost of a long-term loan with a high interest rate can be thousands of dollars more than that of a short-term, low-interest financing plan.  

Set a Target Purchase Price

After you've determined the monthly car payment you can afford, you're in a better position to choose a vehicle that fits into your budget. If you're trading in your current vehicle or making a large down payment, you can either go for a more expensive model or borrow less money. When you're selecting a car, make sure you also take into account the sales tax and additional fees you need to pay. One easy way to estimate these extra costs is to add 10% to the sticker price of the vehicle.