Spreading the car’s cost over more months lowers the monthly payment but will cost more in the end because of additional interest charges.
Know how much you can afford to pay each month. Then use our calculators to determine the car price that fits your budget.
Focusing on the total price can help you stay in control, not the dealer, and pay what you want to spend.
If you’re interested in buying a car, you’ve probably heard that it’s best to focus on the total price of a car first and then worry about the payment.
But why is this? Why not focus on the amount you’re going to pay every month? It’s a good question, and we have the answer.
Use Monthly Payments to Your Advantage
Traditional auto-buying wisdom says to focus on a total price first rather than a monthly payment because a monthly payment can become problematic if the dealer learns your budget.
For example, if you want to keep your new car payment to $400 per month, the dealer might easily get your payments within your budget. But to do so, they may have to spread out the payments over a long term, such as 72 or 84 months. The result is that the car will be a lot more expensive by the end.
In our example, a car payment of $400 per month for five years (60 months) equates to $24,000. But the same $400 per month spread out over six years (72 months) is $28,800, while it’s $33,600 over seven years (84 months). If you solely focus on payment, these might all seem like the same $400 per month, but if you focus on the sum of all those payments, you’ll see significant differences between these figures.
RELATED:What Term Should Your Car Loan Be When Buying?
Average Monthly Car Price
As the cost of vehicles increases, so do monthly payments. Data from Cox Automotive, Autotrader’s parent company, indicates the estimated typical new car monthly payment in the first quarter of 2023 was $766. Used car buyers paid about $250 per month less. According to a report from the credit monitoring company Experian, the average monthly payment for a used car in the same period was $516.
The amount financed with an auto loan is the biggest part of a monthly car payment, and interest paid to the lender makes up the rest. In general, borrowers with lower credit scores have higher interest rates on loans, resulting in higher monthly car payments.
A car payment is a critical consideration for most shoppers interested in buying a vehicle due to budget needs or constraints. Never overextend your budget for a car.
You can find out your budget by using our MyWallet tool, found on the dollar sign icon in the upper right-hand corner of the Autotrader website.
Using the tool, you can plug in your monthly budget for a car and add your car trade-in value, if applicable. Then, add your down payment amount and credit terms, or let the tool find loans for you based on your credit score range.
The MyWallet tool provides a suggested vehicle price to you, and then you can search and shop available vehicles in your price range.
That way, your vehicle search starts within your budget, and you can locate cars you can afford while filtering results by new or used, body style, fuel type, and more.
Remember, you’re in the driver’s seat when you shop this way.
At the dealership, just remember that the dealer can increase the loan term to make a car’s monthly payment fit into your budget. But there’s no way to do that with the total price. Since the total price is final, there aren’t any tricks to make it seem lower than its actual cost.
So remember, do your homework first. Determine the total price you can afford by plugging in your parameters to determine a monthly payment that you can afford using the payment terms you want at a predetermined interest rate you want to shop for at the dealership.
That way, you’ll pay exactly what you want to spend — or less. And you’ll be in charge, not the dealer.
How Big Should the Down Payment Be?
The more you put down a car, the less money you must finance with a loan. The less you finance, the lower the monthly payment. Some lenders may require you to pay 20% of the purchase price with cash as a down payment. Even if that percentage isn’t mandatory, it’s a good rule of thumb to follow.
How to Calculate Monthly Car Price
Use our Auto Loan Calculator to learn the monthly car payments for your next vehicle. It starts with the vehicle price (including taxes and fees) and subtracts the down payment amount and trade-in credit. The interest rate is applied to that figure, and the total is divided by the number of months in the loan term. The result is the estimated monthly payment for the vehicle that interests you.
Read Related Articles:
Car Payment Guide: Calculating What You Can Afford
Car Negotiations Guide: Everything You Need to Know
Can You Buy a Car With a Credit Card?
Editor’s Note: This article has been updated for accuracy since it was originally published.
The salesperson will probably begin the discussion by focusing on the vehicle's MSRP (manufacturer's retail sales price) or on your monthly payment. Don't take that detour. If he starts with price, make sure you negotiate from the bottom-most price and work up, not down from the MSRP.
Traditional auto-buying wisdom says to focus on a total price first rather than a monthly payment because a monthly payment can become problematic if the dealer learns your budget. For example, if you want to keep your new car payment to $400 per month, the dealer might easily get your payments within your budget.
Clever salespeople want you to focus only on low monthly payments because it gives them room to inflate other variables, such as the loan interest and length. This increases the dealer's profit — while you spend thousands more on the car overall.
Once you're at the dealership, use some “word tracks” of your own. If a dealer tries to push the conversation toward monthly payments, tell them, “I'd rather focus on the overall cost.” If the numbers are more than you expected, say, “I'm sorry, but that's out of my budget.”
One of the biggest rewards you'll reap by paying off your car loan early is the money you'll save in interest. The longer your loan is open, the more interest you'll pay. As a result, those who pay their car loan off using a lump sum will probably see more savings.
Your monthly auto loan payments should not exceed 10 to 15 percent of your pre-tax take-home salary. Due to increased vehicle incentives, drivers may find relief when shopping for a vehicle this year. To secure the best deal, work to improve your credit score and consider making a sizeable down payment.
Use your annual income as a starting point to calculate how much car you can afford based on monthly payments. Financial experts recommend spending no more than about 10% to 15% of your monthly take-home pay on an auto loan payment.
Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15% to 20% on total car costs such as gas, insurance and maintenance as well as the payment.
If you have been qualified for a $30,000 car loan, the monthly payment depends on the amount of the down payment, interest rate, and loan length. For example, with a down payment of $2,500, an interest rate of 5%, and a loan length of three years, you will have to pay $824.20/month.
Tell a car salesperson your budget for monthly car payments, and guess what? That's what your payment will be, no matter how much the car should have cost. That's why you first want to negotiate the total price, interest rate, and trade-in value.
For instance, using our loan calculator, if you buy a $20,000 vehicle at 5% APR for 60 months the monthly payment would be $377.42 and you would pay $2,645.48 in interest.
For decades now, car salespeople have constantly gone to “talk my manager” for permission to negotiate during the sales process. This tactic, paired with countless other dealer antics is very frustrating for customers. If you're unfamiliar with your salesperson saying “let me go check with my manager,” you're lucky!
In most cases, you'll still need to negotiate the value of your trade, the cost of financing and the price of any add-ons. If a car is in high demand, a dealership can charge far more than the sticker price. When demand is lower, you can expect to pay less than the sticker price.
It is considered reasonable to start by asking for 5% off the invoice price of a new car and negotiate from there. Depending on how the negotiation goes, you should end up paying between the invoice price and the sticker price. Used cards. You tend to have more wiggle room with used cars.
Based on your pricing homework, you should have a good idea of how much you're willing to pay. Begin by making an offer that is realistic but 15 to 25 percent lower than this figure. Name your offer and wait until the person you're negotiating with responds.
Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.
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