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    Car Loan Math Explained

    When you finance a new car, it is important to understand the costs involved.

    Not only will this help you secure a better deal, but it will also ensure that you set a clear budget without the risk of overspending.

    Most buyers know that financing a car means they’ll have to pay a bit extra over the repayment term.

    Still, there are more things than the interest and term.

    You should run an estimate of the loan so you can budget your monthly expenses accordingly and realize the actual cost of the vehicle, and not just the sticker price.

    The CFPB Worksheet For Deciding What Car Loan You Can Afford

    The Consumer Financial Protection Bureau, commonly known as CFPB, offers a pre-designed worksheet to help you quickly compare and choose the best car loan by considering factors like:

    • Transportation budget
    • Expenses like insurance, gas, maintenance charges, and unexpected repairs
    • Cost of multiple cars alongside interest rates

    Start with your monthly budget estimate. It is a safe rule to allocate 10–15% of your monthly net income towards transportation.

    Deduct additional expenses like gas money, maintenance costs, and insurance from the budget.

    The remaining amount is what you can use to make loan repayments.

    Next, choose 2-3 car models and compare the rates and terms of various lenders to figure out the total costs and interest.

    The CFPB Worksheet for Calculating Car Loans

    The CFPB worksheet takes into account all related expenses like:

    a)       The car’s sticker price
    b)      Title fees
    c)       Insurance, warranties, and registration fees
    d)      Taxes, down payments, rebates, and discounts
    e)      Trade-in cost

    To start the calculation, begin by determining the upfront costs of multiple vehicles.

    Add up the vehicle’s listed price, cost of accessories and add-ons, taxes and title fees, and other negotiable fees like origination and processing fees.

    Based on the total cost, calculate how much you need to borrow by deducting any down payment and trade-ins from the total.

    Next figure out the interest rates and repayment terms to get an estimate of your monthly payments and how much you’ll pay as interest over the term.

    Calculating Interest Costs

    You can calculate the estimated interest that you’ll be paying on the loan from the worksheet itself.

    It is a straightforward process which you can do by using a simple formula: I = P x R x T, whereby:

    • “I” the Interest cost accumulated over the term
    • “P” is the Principal
    • “R” stands for the rate of interest, usually expressed in decimal values
    • “T” denotes the term of the loan, expressed in years

    For the equation to be correct, you must ensure you calculate the rate and length at the same time.

    For example, you have to measure the term (T) in years if you use an annualized rate of interest (R).

    For instance, a car loan of $20,000 for 48 months with a 5% interest yearly means that the simple interest accumulated will be $4,000 over the term.

    Online Calculators

    In case you find the manual calculations overwhelming, worry not as there are easier online calculators that can help you to run quick stimulations and get as many estimates as you want.

    A search on the internet will fetch you many websites but keep yourself limited to using online calculators offered by reputable websites that request no identifying personal information or critical financial details.

    Some of these calculators offer advanced features and consider additional variables to better estimate the costs.

    All these calculators will display accurate results as long as you feed in all of the required information.

    Don’t Forget Extra Expenses

    If you wish to get accurate estimates and better plan your budget, make sure that you include all additional expenses.

    Some extra expenses that the CFPB suggests for your calculation include:

    •  Loan Processing/Origination Fee – a small upfront cost charged by most lenders. Note that these are negotiable.
    • Title Registration Fee & Taxes – More upfront charges that you need to bear. These are non-negotiable.
    • Insurance Fee – The premium you’ll be paying on a regular basis, probably every month, semi-annually, or annually.


    Detailed research will help keep your finances in stellar shape.

    Understanding the math behind the car loan will ensure that you get better clarity about the total expenses and not just the sticker cost.

    Besides these benefits, it also helps to better manage your debt-to-income ratio.

    Make use of the CFPB guidelines listed above to figure out the best deals.