Car Loan Calculation Basics and the Three Factors Affecting Your Loan

Posted by Nick Niesen on October 29th, 2010

Borrowing money to purchase a new car can be estimated using a car loan calculation. It is important to estimate the monthly payments that you will ultimately be responsible for when paying back the car loan.

There are three basic factors to think about when shopping for a new loan and are used in the car loan calculation: interest rate, loan principal and loan period. Knowing these three items will enable you to understand how much loan you are able to obtain. Using these to make your loan calculation will help you establish your budget for making the monthly payments.

Finding out the answers to these three questions is as simple as asking your loan officer or going online. Most online lenders have a simple car loan calculator you can access from their web site that will help you determine how much loan you can afford. You can also call lenders and ask them what their lending rates are based on how much you are borrowing and how long you will take out the loan.

Remember that most lenders will want you take out as much loan as you can possibly afford since they will make more money the larger the loan is that you receive. These car loan calculations can give you an estimate of the total costs which you can use to compare against your total income. This will help you determine how much loan you can afford.

To understand the loan process fully, you need to learn and understand what the loan terms refer to. This will help keep your budget on track as you are calculating your loan.

Car Loan Calculation: The Loan Principal

In car loan calculation, the loan principal is the amount of money you originally borrowed. Loan principal is a term used in finance that refers to the original amount of the dept or the original amount of money borrowed. Your total interest charges at the end of the loan period depend on the amount of the loan principal and the loan period. The more principal you borrow the more money you will ultimately be paying back over the course of the loan.

In some cases, the loan principal is used to refer to the amount of money left or still owed after the debt has been partially paid. In this case, the loan principal is sometimes referred to as the remaining loan principal or outstanding balance. With each monthly payment, you slowly but steadily chip away at the total loan principal until the balance is paid off.

In car loan calculation, it is important to know that a good percentage of your monthly payments in the first few months are used to cover the interest costs. Only a small percentage is used to pay off the loan principle. This is most commonly seen in amortization loans. As the loan matures more of your payments will go towards paying down the principal and less to pay the interest of the loan. This process continues until the remaining principal balance is paid off.

Car Loan Calculation: Interest Rate

The interest rate is usually expressed in percentage and is referred to as the amount of money charged outside the loan principal amount. The lower the interest rate the lower your monthly payments.

Car Loan Calculation: Loan Period

The loan period refers to the life cycle of the loan, the length of time the borrower agreed to pay back the lender. The longer the loan the more expensive the loan will be.

Car loan calculation is an important part of purchasing a car loan. You can determine how much your loan is going to cost you by utilizing good car loan calculation.