How to use an auto finance calculator: A step-by-step guide

Young woman using auto-finance calculator

It’s useful to know how to use an auto finance calculator when you plan to buy a car. Fortunately auto finance calculators are not that difficult to figure out.

For example, the Affordability Calculator at Santander Consumer USA (SC) requires only four steps: Desired monthly payment, financing term, annual percentage interest rate (APR) and down payment.

The simplest way to start filling in the blanks is by applying something like the 20/4/10 “rule” long recommended by financial experts – 20% down payment (and/or trade-in), four-year term, payments no more than 10% of your household’s gross annual income.

However, 20/4/10 isn’t really a rule, but a simple formula, or suggestion, aimed at helping you avoid financial trouble while still getting the vehicle you need.

Step 1: Desired monthly payment

For example, if your household earns $75,000 in gross income, about the national median, 10% would be $7,500. Divide that by 12 months and your monthly payment would be $625.

There are more complicated ways to determine the desired monthly payment, but they also are likely to be more precise. That includes tools such as the simple SC Budget Calculator or more detailed household finance calculators at SmartAsset, FinancialMentor, Calculator.me and Kiplinger.com.

This probably is the most difficult step in the process, depending on how hard you work the numbers.

Because, if you already are making monthly payments on another vehicle, you may have less money left in your total annual budget for new vehicle payments. Assuming you want to keep to the 10-15% maximum annual transportation costs recommended by Financial Mentor and Calculator.me (see above) or the 20% recommended by NerdWallet personal finance website.

For the moment, let’s assume you have no other vehicle payments, although the typical U.S. household owns about two vehicles, according to available research.

Step 2: Financing term

The longstanding 20/4/10 rule suggests a financing term of no more than four years.

However, you may decide a term of five years, or even six years, about the average length of time owners keep their vehicles, to be more realistic both practically and financially.

In any case, you’ll need to translate that term into months for the SC calculator – and most others. That means you would be financing your vehicle purchase for 48 months, or, if you decide a five- or six-year term, you would be using 60 or 72 months.

The typical term for new-car and used-car financing is about 72 months, according to Edmunds, the automotive research website, although it recommends financing for no more than 60 months.

Step 3: Annual percentage rate

Next, you’ll need the average interest rate based on your credit score or other qualifying factors. NerdWallet recently reported an average 10.5% interest rate on a used vehicle for a borrower with a credit score of around 650, because that score is considered “nonprime.”

A consumer with the same credit score typically would pay less interest when financing a new vehicle – about 3% less in our example – according to the website.

Enter your estimated interest rate from a source such as NerdWallet into the SC Affordability Calculator under APR and you’re almost done determining how much car you can afford. Remember that interest rates can change frequently, so it will be important to get up-to-date information.

Step 4: Down payment

The dollar figure in the final calculator field depends on what you’re willing or can afford to spend on a down payment for your vehicle – remember, 20/4/10 suggests 20%. In other words, a $40,000 vehicle would call for an $8,000 down payment, a $30,000 vehicle would require a $6,000 down payment and a $20,000 vehicle would involve a $4,000 down payment.

A down payment of at least 20% still is recommended for new vehicles by sources such as Edmunds, Autotrader and Progressive.com, with about half that typical for used vehicles.

The average down payment for all vehicle purchases is about 12%, according to an Edmunds analysis.

The bottom line

So, let’s say you have concluded that you can afford a $625 monthly payment, can afford a down payment of $5,000, and want to finance the vehicle for 48 months (four years) at 10.5%. That means you could afford a vehicle priced around $29,400, not including taxes and fees.

Finance the purchase for 60 months and you could afford a vehicle priced at about $34,000. Stretch the same payments to 72 months and you may afford a $38,300 vehicle.

Perhaps you figure that your household budget will allow a $425 monthly payment, instead, just above average for used vehicles, and a down payment of $2,500. That means you can afford to buy a car priced just over $18,000 with a 48-month term and about $22,300 over 60 months.

The point is that the calculator enables you to play with the numbers – monthly payment, term and down payment – until you find a combination that will work best for your budget.

An auto finance calculator may be the simplest way to fill in the blanks on your vehicle purchase.

RELATED

Here’s how long a car should be financed new or used

How to set up a monthly budget to finance a new vehicle

Why your credit score is important when financing a vehicle

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

Santander Consumer USA is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

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