The basic formula is:
Monthly payment = (total amount financed + fees) * (interest rate / 12) / (1 - (1 + interest rate / 12)^(-number of months))
Here's how each factor impacts the monthly payment amount:
1. Total Amount Financed: This represents the sum of the vehicle's purchase price, any down payment, and any additional fees or charges rolled into the loan. The higher the total amount financed, the higher the monthly payment will be.
2. Interest Rate: This is the rate charged by the lender on the loan amount. It is expressed as a percentage and affects the cost of borrowing the money. A higher interest rate results in a higher monthly payment.
3. Loan Term: This refers to the length of the loan, typically measured in months or years. A shorter loan term leads to higher monthly payments, as the loan is paid off more quickly. Conversely, a longer loan term results in lower monthly payments but a higher total cost of interest over time.
4. Additional Fees and Costs: These may include processing fees, documentation charges, and any other non-interest-related expenses associated with the loan. Adding these fees to the total amount financed increases the monthly payment.
The car payment calculator uses these inputs to calculate the monthly payment amount needed to cover the principal (the amount borrowed) and interest over the loan term. It also considers any additional fees and costs to provide an accurate estimate of the total repayment obligation.
It's important to note that car payment calculators are primarily estimation tools and the actual monthly payment may differ slightly due to factors such as variations in interest rates, processing fees, and taxes. It is always advisable to consult with the lender or dealership to obtain the most accurate information about car payments and loan terms.
