Auto ownership adds up! How does your monthly payment get calculated?

If you own a vehicle—or you’re in the market for a different one—you know that the cost of ownership goes beyond your monthly loan payment. Expenses, such as fuel, maintenance, repairs, tires, insurance, registration and depreciation all need to be considered. 

But, have you ever wondered how your monthly loan payment gets calculated? Your borrowing costs depend on three things:

1. The finance charge, expressed as an annual percentage rate (APR)
2. The term, or length of time the loan lasts
3. The principal, or amount you borrow

APR
APR is a percentage of the loan principal that you must pay to your credit union, bank or other lender to finance the purchase. This finance charge includes interest and any fees for arranging the loan. The charge gets added to the amount you borrow, and you repay the combined total, typically in monthly installments over the term.

For example: if you took out a $15,000 four-year auto loan with a 7.5% APR, the minimum monthly payment would be about $363. If you only made minimum payments throughout the life of the loan, you would pay $2,408 in interest, meaning that you'll be on the hook for $17,408 total (principal + interest). 

When you’re looking for a loan, you want the lowest APR you can find for the term you choose. The higher the rate, the more it will cost you to borrow. 

Term
The term of your loan also affects borrowing costs. A shorter term means higher monthly payments (because you have less time to pay it back) but a lower total cost (because you aren't accruing interest for as long). The reverse is also true. A longer term means lower monthly payments but a higher total cost.

For example, consider the differences on that $15,000 loan at a 7.5% APR from the example earlier. The monthly payment for a three-year term would be about $467, a four-year term would be $363, and a five-year term would only be $301. But the interest and finance charges go the opposite direction. It would cost you about $1,798 in interest for the three-year term, $2,409 for the four-year term, and $3,034 for the five-year term. 

You may still choose the longer term, and the higher cost, if you can manage the smaller payment more easily than the larger one. You don’t want to put yourself in a position to default on the payments. 

Keep in mind that a car might start to cost you money for upkeep after it reaches a certain age or you’ve driven it long distances. You don’t want to choose such a long term for your car loan that you’ll still be paying off while also having to pay for major repairs.

Principal
The more you borrow, the higher the borrowing costs. The finance charge is determined by multiplying the interest rate times the principal. By reducing your principal, you can make borrowing more affordable.

The more money you’re able to put toward a down payment, the lower your principal balance will be, therefore your overall interest cost will be reduced. Looking for a car that will have a good trade-in value, and trading it in while it’s still in good condition, could also help you save money in the future.

By factoring in these considerations—plus the additional costs associated with car ownership—you can determine what car payment works with your budget. 

Explore loan options before you buy! 
Wouldn’t it be helpful to calculate vehicle payments before you start shopping? Or, what about comparing two different loan options?

Vantage offers online calculators so you can try out different scenarios and budgets to see which option may be right for you. 

Calculate your vehicle payment

Our financial coaches are available to look at your overall financial picture and present your available options.