Understanding Car Payments

Borrowing money for a car means you'll receive a new monthly payment along with a set of keys. This might lead you to question what makes up a loan payment and how it is calculated.

Here, we’ll break down the components of an auto loan payment and offer tips for managing your payments effectively.

The components of a car payment
1. Principal
The principal is the amount of money you borrow to purchase the car. For instance, if you're purchasing a car that costs $35,000 and you put $5,000 as a down payment, the principal of your loan is $30,000.

Each monthly payment reduces the loan's principal balance. The more you pay toward the principal each month, the quicker you'll pay off the loan. Paying directly toward the principal reduces the loan amount, which also lowers future interest payments.

For example, a $30,000 auto loan with a 7.49% APR for 60 months, means a payment of approximately $601. If you add an extra $100 per month to the payment and paid $701 per month, the extra amount gets applied to the principal balance which reduces the length of time required to payoff the loan by nine months and also reduces the total interest paid.

2. Interest
Interest is the price you pay to borrow money from a lender. The lender will review your credit history to determine the interest rate they offer you. The higher your credit score the lower your interest rate will be. Lower interest rates equate to lower payments and lower payments save you money in finance charges. With a lower monthly payment, you pay less in interest over the life of the loan than if you had a much lower credit score.

For example, a loan with a 6.49% APR at 72 months costs $16.81 per month for every $1,000 borrowed. Therefore, a $40,000 loan would have a monthly payment of $672.21. The same loan with a 10.89% APR requires payment of $759.11, nearly $100 more a month than the lower rate. Over the term, the lower rate saves $6,257 in interest over the life of the loan.

3. Loan term
Although not part of the loan itself, you'll likely see this mentioned on your monthly statement or loan documents. The loan term is the time you have to repay the loan, usually in months. Auto loan terms typically range from 36 to 84 months. The length of your loan influences your monthly car payment - longer terms reduce monthly payments but increase the total interest you'll pay over time.
 
For example:
Loan amount Rate Term Payment
$50,000 6.49% APR 60 months $978.07
$50,000 6.49% APR 72 months $840.26
$50,000 6.49% APR 84 months $742.23
4. Additional costs
If you have included additional costs in your loan, they may also be reflected in your monthly payments. This could include:
  • Taxes and fees: If you choose to finance taxes, registration fees, or other upfront costs, these will be included into your loan amount, slightly increasing your monthly payment. However, these costs won't be itemized separately; rather, they'll be incorporated into the principal amount.
  • Add-ons: Optional add-ons, such as extended warranties, GAP insurance, and other products you choose to finance, will also be added to your loan principal, resulting in a higher monthly payment.
Car costs not included in your payment
While these expenses are not included in your monthly loan payments, they are essential aspects of car ownership:
  • Insurance: Lenders require you to have comprehensive and collision coverage in your financing agreement to protect the car in case of an accident. Insurance premiums depend on factors like the car's value, your driving record and your location. It's important to shop around for the best rates and consider insurance in your monthly car expenses.
  • Maintenance: Regular maintenance and upkeep of your car are necessary, so be sure to include them in your budget.
  • Fuel or electricity: Of course, you won't be driving without fueling up or charging your car. Whether you're on a road trip or commuting to work, having the energy to keep the car powered is essential.
Managing your car payment
Effectively managing your car payment involves careful planning and budgeting. Here are a few tips to help you keep up with your payments and reduce the overall cost of your auto loan:
 
  • Shop around for the best loan terms: Compare offers from multiple lenders to find the best interest rate and loan term. Even a small difference in the interest rate can save you hundreds or even thousands of dollars over the life of the loan.
  • Consider a larger down payment: Try to make a larger down payment to lower the amount you need to borrow. This will lower your monthly payments and reduce the total interest paid. Delaying your car purchase by a few months can be worth it if it allows you to increase your down payment.
  • Choose a shorter loan term: Longer loan terms mean lower monthly payments, but they come with higher interest costs. If you can, choose a shorter loan term to save money over time.
Understanding the factors that influence the cost of your car payment can help you choose the right vehicle. Ready to close the deal on a new car? Pacific Service CU offers auto loans with low rates and flexible terms. For more information, call a member service representative at (888) 858-6878.