Before financing a car, it’s important to understand how monthly payments are determined and what factors influence financing costs. You can then make the best financial decision by calculating your car payment accurately.

Key components of a car payment

A car payment consists of principal and interest, with additional costs such as taxes and registration fees usually included. The main factors that determine the monthly payment include:

• Financed amount – The total borrowed after factoring in the down payment and trade-in value
• Interest rate – The annual percentage rate the lender charges
• Finance period – The number of months you plan to finance

Monthly car payment calculators like ours allow you to input the above details and generate the estimated monthly payment.

Factors that influence car payments

Beyond what’s mentioned above, several elements affect how much you’ll pay each month:

• Credit score – Higher scores often lead to lower interest rates, reducing the monthly payment
• Down payment – A larger down payment lowers the principal, reducing the monthly payment and total interest paid
• Trade-in value – If you trade in a vehicle, its value reduces your borrowed amount, which can decrease the monthly payment

How to reduce monthly car payments

If the estimated car payment is too high, consider these strategies:

• Choose a less expensive vehicle – Lowering the purchase price reduces the financed amount
• Extend the financing period – A longer duration reduces the monthly payment, though it may increase total interest costs
• Consider refinancing – If interest rates drop or your credit improves, refinancing can help lower your rate and monthly payment

It pays to do some math before heading to the dealership

Now that you know how to calculate car payments, you can budget effectively for your next vehicle. Once you know what you can afford, Credit Acceptance can connect you with one or more of the 15,000 dealers in our nationwide network. To get a sense of what a financing scenario looks like, start the prequalification process today.