It is important for you to calculate the car loan cost before you signing the loan contract. This is because knowing the cost of the loan would allow you to determine whether the payments involved would fit your budget or not. In order to do this, you should know the loan’s interest rate, the loan term and the borrowed amount. Always bear in mind that the term of the loan affects the payments that you are going to pay. Although you will have lower payments on a long term loan, you would be paying more interest all throughout the loan term.
To help you calculate the cost of a car loan, this article provides some of the simplest steps on how to do this and this includes the following:
- Try calculating the periodic interest of the loan by dividing the loan’s Annual Interest Rate with the number of payments needed for each year. If for example the annual interest rate you have is 8.4 percent, just divide this with 12 to obtain the periodic interest rate and this would give you a result of 0.007.
- Calculate the total number of payments involved in the entire loan term. You can do this by multiplying the number of payments for each year with the number of years indicated on the loan term. For example, a four-year loan would require you to make 48 monthly payments.
- Multiply the amount borrowed with the periodic interest rate. After doing this, multiply the results with the number of payments covering the entire loan term. For example, you borrowed $20,000, multiply this with 48 which is the number of payments in the entire loan term. Upon getting the result, multiply this with 0.007 or the periodic interest rate. You would probably obtain a result of $6,720.
- Add 1 to the periodic interest rate of 0.007 to make it 1.007 and raise this to the number of payments involved in the entire loan term. So this would give you an equation 1.007 raise to the-48th power to obtain the result that is equal to 0.715460091. After this, subtract 0.715460091 from 1 to obtain a result of 0.284539909.
- In order to determine the loan cost divide 0.284539909 with $6,720 and this would give you $23,617.074. Take note that the figures used are based on the example used since the first step.