Calculating Monthly Car Payments: A Guide for Borrowers

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Nearly 50% of people in Canada have a long-term financial budget. This can help you manage your daily expenses and plan for the future. That said, even with the best financial plan in place, it can be difficult to save up for large expenses, such as buying a car.

Fortunately, help is at hand. In fact, more than 19 million Canadians have used car loans and personal loans to cover the cost of large purchases. However, before you take out a loan, it is important that you understand what your monthly car payments will be.

Without doing this, you could borrow more than you can afford, and this could impact your long-term financial stability. So how do lenders calculate car payments for loans? Read on to find out everything you need to know!

What Are Car Loans?

Car loans allow you to borrow money to cover the cost of a new car. So, although the average cost of a car in Canada is now over $40,000, you don’t have to save up this much before you can buy one.

Instead, most lenders expect you to save a deposit for your car. This is usually around 10% for new cars and less for used cars. Of course, you can save up a bigger deposit so you don’t need to borrow as much from your lender.

The lender will make up the difference and pay this directly to the vendor. You then pay this back to the lender in monthly installments over a set period of time.

So how much can you expect to pay for your car loan per month? Let’s take a closer look at how lenders calculate your monthly car payment.

How Do Car Loan Repayments Work?

There are three main components that determine your monthly car loan payments. Understanding these and how they affect one another will help you calculate your monthly car payments.

1. The Amount of Money You Need to Borrow

The amount of money you borrow will obviously dictate how much you have to pay back. So lenders start by looking at this amount as the baseline for your monthly repayments.

2. The Term of Your Loan

The term of your loan refers to how long your contract lasts. This is also known as the loan repayment window.

It dictates how much you have to pay each month to repay the amount you have borrowed. So, for example, a 1-year term will split the cost of your loan over 12 months and a 2-year term will split it over 24 months.

3. The Interest Rate on Your Loan

Lenders make money on their loans by charging interest on them. This means that overall you will pay slightly more than if you bought a car outright.

Different lenders set different interest rates depending on a number of things. Each month you pay interest on top of the basic car loan repayment.

How Does This Help You Calculate Monthly Car Payments?

To calculate your monthly car repayments, lenders will look at how much you want to borrow. They will then offer you a long or short-term repayment period and set an interest rate.

So let’s say, for example, you want to borrow $6,000 for 2 years with a 6% interest rate.

In that case, your monthly repayments will be $250 plus $15 (6%) interest. So each month you will pay your lender $265. Over the two-year period, you will end up paying $360 in interest on your loan.

Of course, to calculate your monthly car payments, you need to know the loan terms on offer. Lenders may offer lower interest rates or short loan windows, depending on your financial history and what you’re looking for.

Because of this, it is a good idea to compare deals on car and van loans before you accept one. This will help you find a good deal.

So when you are choosing a loan repayment window and interest, what should you look out for? Let’s take a closer look at how to find a good deal on your car loan and what affects your options.

Longer Loan Terms Offer Lower Interest

Car loans offering low interest generally sound like good deals. After all, this helps to keep your monthly car payments as low as possible.

However, it is important to look at the loan period on offer as well. Most lenders will offer lower interest rates on long-term loans. This can sound like a good deal but it gives you more time to accumulate interest on your loan.

For example, if you are paying $20 on your loan for a year, you’ll spend $240. Over a three-year period, you’ll spend $720. So a long-term loan could end up costing you a lot more.

This also works in the other direction. For example, a lender may offer your a short loan repayment window with a higher interest rate. In theory, this offers you the chance to pay off your loan and get out of debt quickly.

However, it is important to be realistic about how much you can afford to repay each month. If you have borrowed thousands of dollars as a short-term loan, your monthly repayments will be much higher than with a long-term loan.

This may mean that you struggle to make your loan repayments each month. This could result in you having your car repossessed or you could get stuck in a cycle of debt.

Because of this, it is important to calculate how much you’ll be paying per month and over the course of your full loan term. This will help you figure out whether you are getting a good deal or not. Ideally, you want a loan that doesn’t tie you into a contract for years on end but also offers a low interest rate.

Fixed Rate vs Variable Rate Loans

There are two different types of interest rates that you can choose when taking out a car loan:

  1. Fixed interest rates
  2. Variable interest rates

As the name suggests, fixed interest rates will remain the same for the duration of your loan repayment period. This makes it easier to calculate how much you will spend on your car loan each month.

However, depending on when you take out your car loan, you could get stuck with a high interest rate. Fixed-rate loans tend to come with stricter terms. So, for example, you won’t be able to pay off your loan earlier if you can.

In comparison, variable rate loans offer more flexibility. If you get a financial windfall, you may be able to use this to pay off your loan early and get rid of your debt.

Unfortunately, this flexibility can also work in your lender’s favor as well. This means that they can adjust the interest rate on your loan throughout the repayment period. If the economy changes, your monthly interest payment could skyrocket.

As a result, it is much harder to calculate monthly car repayments for variable interest rate loans.

Secured Loans

Secured loans offer great fixed interest rates for the duration of your loan period. So it is worth asking about these when you are shopping for car loans.

In exchange for a low interest rate, lenders accept your new vehicle as collateral. This means that if you default on your loan repayments, they can repossess your car. This protects their investment, so lending you money is less of a risk.

If you are going to do this, you must be sure that you’ll be able to afford your monthly payments. If you don’t, you could lose your new car!

Most lenders will only offer secured loans for new vehicles, as these hold their value better than used cars. So this option depends a lot on the type of car you want to buy.

Generally, these loans are also only available for people with a great financial history.

How Does Your Financial History Impact the Terms of a Loan?

Before approving your loan, most lenders will take a look at your financial situation. This might include asking about your monthly or annual income and running a credit check.

A credit check will show them your credit score, which reflects your financial history. Some things that affect your credit score include:

  • How well you manage your financial commitments (such as paying bills and rent on time)
  • The amount of debt you already have
  • The number of bank accounts you have

Your credit score can range from 300 (a very poor credit score) to 900 (an exceptional credit score.) Having a better credit score can help you negotiate better loan terms. So, for example, you may be offered a lower interest rate.

In comparison, people with credit scores below 600 will find it harder to get approved for a loan. If you do successfully get a loan with a credit score of 600 or lower, most lenders will offer you much higher interest rates.

Tips For Improving Your Credit Score

56% of people in Canada have never checked their credit score, but it is a good idea to do this before looking for a loan. Thankfully, you can check your credit score for free using websites like Experian.

If your credit score is below 600, this can make it more difficult to get a good deal on a car loan. Fortunately, there are plenty of things you can do to improve your credit score.

You should focus on:

  • Managing your existing financial commitments on time
  • Clearing any debt that you already have
  • Paying off your credit cards
  • Aiming for 30% credit utilization or less on your credit card (this means that you do not use all of your available credit each month)
  • Avoiding opening new bank accounts

You can build a good credit score in a matter of months by getting on top of your finances. So after a few months, you will be in a much better position to get a car loan.

Budgeting For Your Monthly Car Payments

When it comes to buying a car, a lot of people start by looking at the make or model of car they want.

However, it is a better plan to figure out your budget before you start shopping around. This will ensure that you are only looking at vehicles that you can afford.

Looking at your monthly income and outgoings will help you figure out how much you can afford as a car payment. Start by removing any essential spending, such as rent, mortgage payments, and bills, from your monthly income. Then track your spending for things such as socializing, hobbies, and non-essential purchases.

This will help you figure out how much you have left over to spend each month. For example, if you have $300 spare each month, you could manage monthly car payments of around $250 or less. Doing this before getting a car loan quote will help you figure out which options you should pursue.

Figuring out your budget can also help you save a bigger car deposit. This is another great way to reduce the amount of interest you have to pay on your car loan.

This is a great opportunity to set spending budgets for your everyday life. This will help you get on top of your finances and improve your credit score. So it can make getting a car loan easier in the long run.

Get a Quick Quote For a Car Loan Today

As you can see, a lot can affect how much your monthly car payments are.

This depends on how much you want to borrow, the length of your loan repayment period, and the amount of interest you are paying. Fortunately, there are plenty of things you can do to improve the terms of your loan to find a deal that suits you.

Are you looking for a car loan? Then get a fast loan quote from Cars Fast today. We’re here to help you find a great deal!

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