How to Calculate the Finance Charges on a Car Loan
When taking out a car loan, one of the most important factors you have to consider is how much you can afford to spend. Aside from the payments for the principal amount and the interest, you will also need to pay for its processing, account maintenance, closing fee and all other charges that come with your borrowing.
Finance charges widely differ according to the type of loan you are getting and the lending company that you are dealing with. You may qualify for a car financing from two different lenders that come with two different sets of finance charges. Thus, it is important to determine what finance charges are included in your car loan.
The Finance Charges of a Car Loan
The total cost of a car loan is comprised of different fees depending on the lender you’re dealing with and the terms you’re getting. The most common finance charges include:
- Principal - The fixed amount you borrow
- Interest - The cost of borrowing the principal amount. It is affected by many factors, including your loan term and borrowing power. The higher your credit score, the lesser is your loan’s interest rate.
- Down Payment - Is the cash you pay upfront to secure the loan. It is usually around 20 to 50% of your car’s purchasing price. The bigger your down payment, the lower your monthly amortization.
- Balloon Payment - Is a lump sum payment at the end of the loan period. It works just like a down payment that affects monthly repayments. If you can’t afford to pay your auto loan upfront, you can opt for a balloon payment financing.
- Application/Origination/Establishment/Acquisition Fee - It is an upfront payment for processing a new loan application, acting as a lender’s commission for processing your application. It is quoted as a percentage of the total car loan. A car loan origination fee is generally between 1 and 2 per cent of the loan amount.
- Encumbrance/PPSR Fee - Personal Property Securities Register fee is an additional upfront cost that covers the cost of registering the encumbrance or security rights on the vehicle. Sometimes, it is included in the origination fee.
- Ongoing/Maintenance Fees - These are the regular fees associated with maintaining your account like annual fees, monthly account keeping fees and offset fees. Apart from the interest fee, ongoing fees can add up over time, especially if you choose a long-term repayment period.
- Documentation/Statement Fee - Sometimes included in the ongoing fees, this payment covers the cost of having your statement sent to you on a regular basis.
- Early Repayment Fee - Some lenders may charge you for paying off your loan earlier than the agreed term or for refinancing your car loan to another lender.
- Missed/Late Payment Fee - Is paid if you fail to make your repayment on its scheduled monthly due date. This can be avoided by setting up a direct debit for your car loan repayments and scheduling your repayments at a more convenient time.
Calculating the Car Loan Finance Charges
There is no single formula that can determine the exact finance charges of your car loan. Typically, most car loan computations only factor in your principal, interest rate, loan term, down payment or balloon payment and repayment frequency.
Nevertheless, these computations provide a good estimate of how much your car financing really cost.
Nowadays, computing for the finance charges of your car loan is just a few clicks away on your computer or smartphone. Most lending companies usually have websites with built-in car loan calculators to help you easily work out your ideal monthly payments.
To use an online car loan calculator, simply fill out the information needed, such as:
- Vehicle’s Purchasing Price
- Loan Term
- Deposit or Balloon Payment
- Repayment Frequency (Weekly, Fortnightly or Monthly)
Other information that may be required include:
- Interest Rate
- Trade-In Value
- Rebate Amount
- Sales Tax
A good online calculator should give you an estimate of your total loan payment, total interest costs and monthly repayment amount.
1. Computing the Monthly Payment
You can get an estimate of your monthly car loan repayment using the following formula:
To get the "principal times the interest rate due per payment":
- Divide the APR by 100 to convert it into a decimal.
- Divide the resulting number by 12 to get the monthly percentage rate as a decimal.
- Then, multiply the principal by the monthly percentage rate.
To get the other half of the equation:
- Enter 1 + the interest rate due per payment
- Hit the button x^y on your scientific calculator then enter the number of repayments.
- Subtract the figure obtained from 1.
Your monthly repayment amount is obtained by dividing the first figure obtained by the second figure.
2. Computing the Finance Charges
Simply multiply your monthly payment amount by the number of payments, minus the amount borrowed to calculate your total finance charges over your loan term.
Other Factors Affect Your Finance Charges
Despite the usefulness of online loan calculators or manual car loan formulas in determining the total cost of your loan, there remain several factors that are not included in the calculation. These include your credit score and the other fees that differ from one lender to another.
Your credit rating affects the interest rate of your loan. The average interest rates associated with credit scores are usually the following:
- 740-850: Excellent - 0 to 3.2% interest rate
- 680-739: Average - 4.5% interest rate
- 680 and below: Subprime - 6.5 - 12.9% interest rate
There are several fees that are not usually factored in when calculating car financing but affect the total cost of your loan. These include:
- One-time application fee
- One-time encumbrance fees
- Maintenance Fees
- Statement Fees
- Early Repayment Penalty
- Missed or Late Payment Fee
Most of these fees are not mentioned while you’re still inquiring for a car loan or asking for a pre-approval, but they can have a significant effect on the total cost of your loan. Hence, they are sometimes called “hidden fees”.
Not all lenders charge hidden fees. If they do, the amount varies from one lender to another. It is important to shop for car loans and know all the charges involved before taking out one.
Tips to Reduce Finance Charges
Most of your car loan’s finance charges are usually dependent on your loan amount interest rate, and loan term. You can modify these variables to get the best deal, save money and pay off your car loan early or within its scheduled term.
1. Get a Good Credit Score
A good credit score not only helps you get approved for financing faster but also helps you negotiate for better loan terms, especially the interest rate. The lower your loan interest, the more money you can save.
2. Offer a Big Down Payment.
If you can provide a substantial down payment for your car loan, your monthly payment amount lessens.
3. Choose the Best Term for Your Financial Circumstance
A short-term car loan of 1 to 3 years will require a bigger monthly repayment amount but will help you save money on interest in the long run. A long-term car loan that can take up to 10 years or more will help you afford a small monthly repayment amount but will cause you to pay too much money on interest and any maintenance fee. It also puts you at greater risk of getting upside down on your car loan since the value of a car depreciates fast
Positive Lending Solutions works with hundreds of banks and lending companies to find the best car loan deal for you. Our dedicated, locally-based consultants will ensure your satisfaction every step of the application process.