Car Loan Formula

The car loan formula is simple. There are just a few things to think about, and once you know what they are, you can figure out the terms of any possible loan. Check out our finance calculators to get started.

If you’re shopping for a vehicle — whether it’s a car, truck, minivan or SUV — you need to know a few things. The main thing is the price. How much does the dealership (or even the individual, if you’re doing this as a private sale) want for the vehicle? Is it a firm price or is there room to negotiate? Just a tip: there’s almost always room to negotiate. Negotiation is just one part of the whole car loan formula.

Once you’ve done your negotiating back and forth, you’ll have the price as your starting point for the car loan formula. The next important thing is the down payment. How much money do you have, right now, to put down on the vehicle? Obviously, you probably don’t have the entire price of the vehicle, or else you’d probably just pay cash and be done with it. If you are financing the vehicle, you’ll need a down payment. Sometimes a trade-in is considered as a down payment. If that’s the case, you’ll need to know what the trade-in value is. Even if you trade in your current vehicle, you still might want to put an additional amount down (if you can) to reduce the amount of the loan.

Generally, the more you put down (or trade in), the better your terms are going to be for your loan. This is because you’ve got “skin in the game.” Lenders like to see that a borrower is willing to share the risk of the loan by ponying up some cash. The interest rate is obviously the next element of the car loan formula. It’s determined by the amount, by your credit history and earning power, and lots of other factors. It might also be tied to the term, which is another piece of the formula. How long are you going to take to pay off the vehicle loan? That makes a big difference, and it’s something you need to consider as you figure out what you’re going to be doing.

There are a few other “extras” to consider. Tax, title and license fees work themselves into the formula too. These can sometimes add considerable cost to your loan, so don’t forget to factor them in.

Once you have all of the parts of the formula, plug them into an auto loan calculator like you can find at, and see what happens. You may find that you’re surprised by some of the things you discover. But once you truly understand the whole car loan formula, you’ll be in a much better position to understand all of the terms of the car loan you eventually get.

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