Buying a car is likely among the biggest purchases you will ever make. However, like most car-buyers, paying for the vehicle you like upfront may not be possible at the moment. And even if you do have significant disposable cash, the last thing you want is to deplete your account to finance a vehicle. Either way, the best option you have to be able to purchase a new car is to take out an auto loan.
Before hitting a dealership or credit union, however, know that an auto loan is a big financial commitment. So it is crucial that you only take out what you can afford to pay to avoid problems later on. A good way to do that is by using a car loan estimator.
Simply put, a car loan estimator is an invaluable tool that lets you obtain a fairly accurate figure of the monthly payment you are going to make for a loan. This simple software is commonly available in most auto loan websites and can be used by consumers free of charge.
The great thing about this software is that it affords you to calculate a variety of “what if” scenarios. For instance, you are applying for bad credit (link to https://www.bestautolenders.com/blog/buying-a-car-with-bad-credit-and-no-cosigner/) auto loan, which usually has a short term (usually 36 months) and high interest rate (20 percent or higher). Using the estimator beforehand will let you know if you’re capable of making the monthly payments, taking into consideration your current financial situation.
You may also use the estimator to adjust the numbers until you get the payment figure that you are most comfortable with. Just test a number of loan options and document them. From there, you can narrow down your choices and ultimately find a deal that best suits your budget.
Computing monthly car loan payment with an estimator is easy to do. You only need three vital pieces of information:
- the amount of loan
- the interest rate, and
- the loan term in months.
To fully understand all three, below is a brief explanation for each of them.
The amount of loan pertains to the price of the car itself. To determine the sales price of a vehicle, you have to know its make and model. You may even be able to negotiate for a lower price, but since you can never really tell if you can, you may settle with the retail price when doing your computation.
The interest rate of the loan will largely depend on your credit score. In most cases, dealerships and credit unions are more likely to give competitive interest rates to people with good credit rating. If you are at the opposite end, though, expect to pay higher interest rate, not to mention that you will have limited loan options to choose from.
Meanwhile, the loan term refers to the period over which you have to pay the loan. This is set by the lender and usually calculated in months. According to a post on Forbes (link to http://www.forbes.com/sites/moneybuilder/2014/05/22/what-to-know-before-hitting-the-car-lot-in-2014/), most dealerships can provide repayment terms of up to 96 months for new car loans and 84 months for used car loans. Banks and car manufacturers, on the other hand, can offer financing with a term of up to 72 months.
Of course, if you are applying for a bad credit auto loan, you can expect shorter loan terms–around 36 to 48 months–given that lenders often deem those with lower credit ratings to be high risk.
Putting these three information on the car loan estimator will deliver a detailed summary of the monthly loan payments you need to make.
When using a car loan estimator, try to follow these tips to make the most out of the software.
- Be sure to fill out the required information
- Try different loan amounts, interest rates and terms
- Write down the result for each “what if scenario” so you can make comparisons and determine the best term that you can handle.
Like many people, you surely look at a car as a necessity. For you to be able to afford one, however, you need to take out an auto loan, which entails a big financial commitment on your part. To ensure that you will be making the right loan choice and you will be prepared for negotiations with car dealers, take the time to use a car loan estimator.