How to Calculate a Monthly Payment on a Car Loan

There are thousands of websites that will calculate a monthly automobile payment for you. All you need do is plug in the amount you plan to borrow, the interest rate and the number of months you need to pay off the loan, and the monthly payment will magically appear. However, if you prefer to take a more hands-on approach by doing the work yourself, you need to go no further. Read on.

Write down, or commit to memory, the following formula and you will need nothing else to figure your monthly car payment: P x (i / 12)) / (1 - (1 + i / 12)-n. Now what do all those numbers mean? In the formula, “P” is the amount you plan to borrow, “i” stands for the interest rate on your loan, and “n” means how many months you will have to make your monthly payment until the loan is paid off.

Understand better how the formula works by using the following example. Let's say you need to borrow $25,000 to buy that car of your dreams, and the interest rate will be 6 percent. You're guessing that you'll need 3 years, or 36 months, to pay off the loan. Using the formula above, that results in a calculation that looks like this: ($25,000 x (6% / 12)) / (1 - (1 + 6% / 12)-36). Do some quick math and it results in this: 25,000 x 0.005) / (1 - (1+ 0.005) -36 Voila, you will have to pay $760.55 each month for the next 3 years to drive off that beauty.

Recognize that this formula does not consider the amount of your down payment, the sales tax on the vehicle or any other fees that may be due when you buy your car. So you will probably owe considerably more up front before your car payments are due.

Estimate the size of your monthly payment while you are shopping for a car by using a simple rule of thumb. If you plan on a 60 month loan at 6 percent, you will pay about $20 per month per $1,000 that you borrow. If you make the loan for only 3 years, your monthly payments will be about $30 per $1,000 borrowed. Again, these estimates do not factor in your up-front costs.