The Ultimate Auto Loan Calculator

Enter “auto loan calculator”, “auto payment calculator” or any other calculator term into a major search engine and you’ll get hundreds of results. Clicking through the options it’s easy to conclude that you have what you need to handle any auto loan. You’re probably right. The challenge that many new and used car buyers face is not the mechanics of the auto loan calculation, it’s what calculations to make and in what sequence.

Problem 1: Prime and sub-prime borrowers have different needs

Prime borrowers often start by selecting the car they want. They then shop for auto loans largely based on who offers the lowest interest rate. Sub prime and non prime borrowers seeking “bad credit auto loans” often start by looking for auto lenders such as banks, credit union or auto finance companies to fund them. That company may approve them based on a specific monthly auto loan payment that they can afford. They then take the terms provided by the lender and shop for a car.

Because both groups come at auto loan calculations differently, calculator developers have developed the now ubiquitous “car loan calculator” and “car payment calculator”. The reality is that there is more to getting the perfect auto loan than calculating the loan principle amount or the loan payment amount. In fact, there’s more to it than varying any of the four key dimensions of interest rate, loan term, amount borrowed (or principal), and monthly payment.

Problem 2: Most people don’t know what they don’t know

While there are the two basic types of calculators, there are a also a dizzying array of specialty calculators to address every possible need. Here’s a list we found from one website.

• Which is better: a new or used vehicle?
• How much should depreciation cost me?
• Should I lease or purchase a vehicle?
• Should I finance or pay cash for a vehicle?
• How much will my vehicle payments be?
• Which vehicle loan is better?
• What term of vehicle loan should I choose?
• Should I use a home equity loan instead of an auto loan?
• Which is better: a rebate or special dealer financing?
• How long should I keep a vehicle?
• What vehicle can I afford?

The SmartCarCredit.com Ultimate Auto Loan Calculator

The SmartCarCredit.com auto loan calculator is based on the simple premise: There is a right way to run the numbers on an auto loan. Further, that the sequence of calculations is as important as the calculations themselves. That is, if you haven’t prepared a budget, how do you know if a payment makes sense? If you don’t know your interest rate, how do you know how much you can borrow?

The SmartCarCredit Ultimate Auto Loan calculator takes borrowers through five discrete steps:

Step 1: Set your budget and payment

You would be surprised how many people buy a car they can’t afford. While the problem also affects “prime” borrowers, it is so prevalent with sub prime borrowers that bad credit auto loans often carry twice the interest rate of prime auto loans. That additional interest charge (in addition to any loan origination or other fees) compensates the auto lender for the cost of repossessing a significant percentage of the cars when borrowers get into financial trouble.

Avoid over-borrowing. Use the SmartCarCredit calculator to calculate your monthly budget first. If you’d rather do it yourself, start with your monthly after tax income. Deduct from that all your normal monthly expenses including your home loan / rent, any student or educational loans, your monthly credit card payments, the monthly cost of food and entertainment. Don’t forget alimony, child support or other required payments. The result is your discretionary income.

Unfortunately, your discretionary income is not the amount you have available for your auto loan payment. You also need to deduct your monthly auto insurance payments and your estimated gas payments. Budget money for maintenance as well. If you don’t have a comprehensive extended warranty, make sure you budget enough for maintenance AND the occasional repair.

The end result is your maximum auto payment. As a general rule it should be about 10% of your gross monthly income. If it’s more than 15% of your monthly income, revisit your calculations as you’ve probably underestimated your expenses.

Step 2: Calculate your interest rate

The base auto lending rate varies with the business cycle and the rate of interest in the economy at large. While it can vary widely, it has spent much of 2006 and the beginning of 2007 at about 6%. While some people have good enough credit to borrow at or near this rate and others may qualify for manufacturer interest rate incentives, the vast majority of us pay an interest rate above the base rate.

How much you pay above the base rate depends on what type of car (new vs. used), from whom you are purchasing it (dealer vs. private party), how long you plan on borrowing (3 years vs. 6 years), your credit rating and where you’re borrowing. While some websites will lead you to believe you need to check for interest rates in your local market, this is actually one of the least important factors as rates vary by less than 1 percentage point cost to coast. See what factors influence your own interest rate by using the “Auto Loan Interest” tab the SmartCarCredit auto loan calculator.

Step 3: Determine how you can safely borrow

So know that you know what auto loan payment you can afford and what auto loan interest rate to expect, you can easily calculate how much car you can afford, right? Not quite. You can calculate the loan principal amount you can afford, but this is not the same as the amount of car you can afford. The third step in the calculator lets you see what impact changes to the payment, principle, term or interest rate has both on the other factors AND on the total cost of interest you pay over the life of the loan.

SmartCarCredit provides this step so that you can input actual terms you may have received from a lender or dealer. It can be an eye-opening experience to see how much you are paying in interest for the car of your desires. It’s driven more than one person to make a larger down payment, pay cash for the car, or buy less car to avoid excessive interest charges.

Step 4: Determine how much car you can afford

What’s the difference between the principle you can borrow and the car you can afford? Dealer incentives, the size of your down payment, the value of your trade in, loan points, license and registration fees, state and local sales taxes all have an impact. Some increase the amount of car you can afford; others reduce it.

To ensure you don’t come up short, the SmartCarCredit auto loan calculator not only helps you estimate these amounts but in some instances, such as state sales tax, even estimates them for you. It’s an important way you can ensure you don’t come up short when it comes time to sign on the dotted line.

Step 5: Get multiple loan quotes.

The last step is one of the most important. Many customers at both the prime and non-prime ends of the credit spectrum rush into the auto purchase taking the first loan offer provided them. The key to getting a good deal on an auto loan is to shop around. While we encourage you to submit the easy loan profile at SmartCarCredit , the important thing is that you compare loan quotes from at least two and preferably three or more financing sources. Comparing loan terms including interest rates and fees is the best way to ensure you get the best deal. At the very least you’ll have peace of mind knowing you got the perfect auto loan.

One final note: if you came to this auto loan calculator after having already taken out an auto loan, don’t worry. If you find that you are overpaying for your auto loan, consider refinancing. Whether through SmartCarCredit or individual lenders, you can use these same calculators to determine if you should switch to another loan. Remember, your lender is not going to tell you! Even if you don’t shave thousands of dollars over the life of the loan, most auto re-financiers can structure a new loan so that you can skip a payment or two.

Regardless of whether you’re looking for a new or used car, auto loan or refinance, have prime or sub prime credit, we encourage you to visit SmartCarCredit and try out The Ultimate Auto Loan Calculator Click here to start!

Disclosure: We developed the content for SmartCarCredit™ while working with automotive industry clients. We hope you find it helpful in making informed decisions. While we believe the information to be accurate, we do not guarantee its accuracy.