Auto loan calculators can be a good way to determine how much a person can actually afford, as well as a good way to figure out what the monthly payment would be on a car you’re considering. Auto loan calculators are a good way to get an estimate of what your potential costs will be, but it is important to realize that these online programs have some limitations. If you want to use an auto loan calculator, consider these tips.
1. Enter multiple combinations of amounts and term lengths.
The best way to use an auto loan calculator is to try a lot of different scenarios. When you’re first making a budget and determining how much you could spend on an automobile, you’ll be considering many different possibilities. Use these calculators as a simple way to see how much small changes in the length of a loan term, the interest rate, and the purchase price will affect how much you pay every month. You’ll be able to see how incremental differences in these categories will affect your overall budget as well.
2. Think about factors other than the interest rate.
While interest rates can certainly have a lot of effect on how much you pay each month, factors such as the loan term and the total amount you have to take out as a loan will also have a big effect on your monthly payment and the total amount that you will eventually pay to the bank. For example, extending a loan term from 36 months to 60 months will usually only reduce your monthly payment by about a third, but it can more than double the total amount that you will pay to the bank over the lifetime of the loan.
Of course, if you really need to reduce the amount you’re spending each month because of a current cash crunch, then it could make sense to take out a loan with a longer payment term, then pay it off early once you have more available funds. Also, consider the effects of making a smaller or larger down payment. For some people, holding on to as much cash as possible might make sense, even if they have to pay a little more each month.
Use an auto loan calculator to consider different scenarios. It may make sense to take a loan at a slightly higher interest rate if a set of different payment terms will allow you to save more money in the long run.
3. The type of car you buy matters.
All too often, people make the mistake of concluding that they should buy a car for as little money as possible, or that they should just buy whatever car they can get for the least amount of money every month. The problem is this mentality is that it doesn’t take into account the long-term costs of owning a car.
This is one area where an auto loan calculator can’t help much. While auto-loan calculators are great at telling you how much you’ll need to pay every month or helping you to figure out if it’s worth it to get a longer payback period, they can’t do much to help you predict the “hidden” costs of owning a vehicle.
Insurance and maintenance tend to be the two biggest factors that many consumers don’t think about until it is too late. Insurance costs are highly dependent on the make and model of the car. For example, sports cars tend to cost more to insure than sedans. Heavier pick-up trucks can cost more simply because of the amount of damage they can cause in an auto accident. These differences can add up to hundreds of dollars a year, potentially costing or saving you a significant amount of money.
Maintenance costs can be even harder to predict. If you’re just looking at the cost of buying a vehicle, it can be easy to assume that you should just buy the cheapest car on the lot. If that car forces you to spend hundreds of dollars a month in repair costs, however, you’re ultimately not saving any money. If you don’t have the ability to fix a car on your own, it may make more sense to purchase a later model set of wheels.
4. Consider add-on costs.
Finally, be sure to consider the cost of dealer add-ons when entering in numbers to an auto loan calculator. While most of these fees are negotiable, it is likely that you’ll be forced to pay the tag and title fees in your area. You may also want to consider add-ons such as extended warranties or protection packages, depending on your personal situation. All of these add-ons can cost thousands of dollars more, which will need to be added to the total purchase price of the vehicle.
There are so many factors to consider when purchasing a new car. If you’re a first-time buyer, you want to work with a bank or lender who can help you with all of these decisions. Whether you’re buying a car or a house, be sure to work with a lender you can trust.