Monthly Car Payments Explained

When financing their car purchase most car loan borrowers choose traditional monthly payment plans where you make a car payment every month.

Car Loan Payments Basics

Each of your monthly car payments is comprised of two charges - a principal charge and a finance charge.

The principal charge is in fact what you have borrowed from the lending party to finance your car purchase, distributed on your payments. The finance charge is the interest you have to pay for the given opportunity to borrow money.

The amount of your monthly payments depends not only on these two charges, but also on the term of your car loan. The longer term you choose, the lower your payments will be. Typically, car loan borrowers choose auto loan terms of three to five years, which means 36 to 60 monthly payments.

How Much Should You Allocate for Monthly Car Payments

Many financial experts advise that you should spend no more than 20 percent of monthly income. You should include in this percent payments on all cars you may own, no matter how many they are.

Other experts suggest the following way of estimating how much you should spend on monthly payments based on your gross income:

• Aim at spending less than 36 percent of your gross monthly income and calculate what that amount is.
• Sum up all your other regular monthly payments, such as mortgage or rent, utility bills, credit card bills, etc.
• Subtract the sum of your other monthly payments from the 36 percent gross income figure.

For example, if your gross monthly income is $6,500 and your total debt payments are $1,500, then you can afford:

$2,340 - $1,500 = $840

This means that you can afford to spend $840 every month for your car payments.

How to Calculate Monthly Car Payments

If you want to calculate your monthly car payments you can use our car payment calculator. If you however want to do the numbers yourself, you can read our article "How to calculate car payments".

The information and interactive car payment calculators that are provided on this site are made available as general assistant guidance in regards to car loans and payments. We do not guarantee that any information or calculations will be accurate or applicable to your personal financial situation, circumstances, or objectives. Accordingly, before making any final decisions we encourage you to consult a qualified professional and get personalized advice.

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