What Makes Up Your Car Payment
Buying a car is often the second largest purchase most people make, right after buying a home. Understanding how your auto loan works can save you thousands of dollars in interest over the life of the loan.
This calculator helps you estimate your monthly payment based on the "Out-the-Door" price of the vehicle, which includes taxes and fees, minus any down payment or trade-in value you provide.
How Interest Affects Your Monthly Payment
The interest rate (or APR) is the cost of borrowing money. A lower rate significantly reduces your monthly payment. For example, on a $30,000 loan over 60 months:
- At 5% APR, you pay roughly $3,968 in total interest.
- At 10% APR, you pay roughly $8,245 in total interest.
That is a difference of over $4,000 just for the privilege of borrowing the same amount of money!
The 20/4/10 Rule of Car Buying
Financial experts often recommend the "20/4/10 rule" to ensure you don't buy too much car for your budget:
- 20% Down: Put at least 20% down to avoid being "underwater" on the loan (owing more than the car is worth).
- 4 Years: Keep the loan term to 4 years (48 months) or less. Longer terms like 72 or 84 months lower the monthly payment but skyrocket the total interest paid.
- 10% of Income: Your total monthly car expenses (payment + insurance + gas) should not exceed 10% of your gross monthly income.
Frequently Asked Questions
What is the "Out-the-Door" price? ▼
The "Out-the-Door" (OTD) price is the final price you pay to drive the car off the lot. It includes the sticker price of the car plus sales tax, documentation fees, title and registration fees, and any dealer add-ons. Always negotiate based on the OTD price, not the monthly payment.
Is it better to have a longer or shorter loan term? ▼
A shorter term (36-48 months) is almost always better financially. You will have a higher monthly payment, but you will pay significantly less interest and build equity in the car faster. Longer terms (72-84 months) are risky because cars depreciate quickly, often leaving you owing more than the car is worth for years.