Calculating and Understanding Car Payments

August 12th, 2022 by

A yellow 2023 Nissan Z is shown from the front at an angle while driving down the road after the owner searched 'Nissan Financing'.

When you’re shopping for a vehicle, one of the most important things to figure out and really understand is your budget and the kind of payments you can afford, along with what different vehicles will cost you. To calculate your monthly car payments, you can either use a simple online calculator or do the math yourself by calculating monthly interest along with the principal of your loan for a car to figure out how much you’ll need to pay based on the duration of the loan. If that seems like a lot to follow, here at Illini Nissan, we’re happy to help you figure it all out. Plus, with Nissan financing available, everything becomes a lot easier.

If you’re interested in fully understanding how financing your vehicle works when it comes to the terms of a loan and repayment, then keep reading to take a deep dive into all of this. We’ll keep things as simple as possible, but we should warn you now: there will be a lot of numbers. But don’t worry, just take things one step at a time, and we promise it will all make sense in the end––plus, those online calculators we mentioned a moment ago make it even simpler to figure everything out on your own.

Step Zero: Understanding All the Terms

Before we get into how to actually calculate what your monthly car payments will be for a vehicle, let’s start by going over some essential terminology that you need to know. Some of this is pretty common sense, but it can also get a bit tricky, so it’s worth reviewing. We’ll be using these terms a lot, and here’s what they mean:

Total Price – This is the full cost of a vehicle, usually based on the MSRP for a new car. It can also be the sticker price, and you may be able to negotiate it lower before you buy.
Down Payment – Any amount toward the total price that you can pay on the vehicle. This doesn’t include anything you need a loan for, just money you already have.
Trade-In Value – The value of a vehicle that you have for trade-in. Remember that if you still owe on your car, then that will come out of its trade-in value toward your next ride.
Principal – The amount that you need to borrow to buy a vehicle; you can also think of this as the loan amount.
Interest Rate – Also sometimes referred to as an Annual Percentage Rate (APR), this is a percentage of the principal that has to be paid, in addition to the principal, to fully pay off the loan. Your loan payments will pay off both interest and the principal.
Term – This is the length of the duration of the loan. You’ll find auto loans with differing terms; a shorter length usually means less interest and lower total paid but requires higher monthly payments.

Now that you’ve got these terms down, we can look at how to actually figure out the monthly payments you’ll need to make on any given vehicle.

A salesman and customer are shown filling out paperwork at a dealership.

Step One: Simple Solution – Online Calculator

For most people, the best way to proceed with figuring out payments on a car is to use a simple calculator online that will do all the work for you. There are numerous websites with tools you can use to calculate what payments will be on a car. In fact, we have a simple payment calculator tool that you can use here on our website to help you estimate what your monthly payments will cost on a vehicle based on the price, interest rate, loan term, and any down payment or trade-in you have.

We recommend using one of these tools to make your life simple because the math to figure out car payments to pay back a loan can get a bit tricky. That being said, if you’re unsure of whether a particular tool is accurate, or you simply prefer knowing how it all works yourself, then you can do the math. Just be sure to double-check your work and be careful that you get the right numbers each step of the way. Let’s take a look at the math for this…

Step Two: Calculating Payments Manually

Before you try to figure out what the payments for a car will be, you need to determine the information we looked at earlier. First of all, you should know the total price of the vehicle. You also need to figure out how much you can afford for a down payment, along with the value of any trade-in you have. In addition to this, you should have a good sense of your credit score and what kind of loan offers you’ll receive regarding both the interest rate and the term or duration of the loan. You’ll need all of this information to figure out your monthly payments.

Now, some of this might seem weird, but here’s what you do:

  1. Start with the total price and subtract your down payment and trade-in value to figure out how much you’ll need to pay––this is the loan amount or principal.
  2. Let’s say, for example, you find that you’ll need a $20,000 loan for a vehicle and that, based on your credit score, you’ll be able to get a loan with 5% interest and a 5-year or 60-month term for repayment. To reiterate:
    i. Principal: $20,000
    ii. Interest: 5%
    iii. Term: 60 months
  3. Divide the interest rate by 12 (the number of payments you’ll make each year). That gives us 0.41667. Now divide that number by 100 to convert it from a percent to a decimal, which gives us 0.0041667.
  4. Add 1 to the number we just got, so now we have 1.0041667.
  5. Now you have to raise that number by the Xth power, where X is the term of the loan in months. So we raise 1.0041667 to the 60th power, and we get 1.2833612.
  6. Subtract 1 from the number we just got, so now we have 0.2833612.
  7. Now divide the monthly interest rate from Step 3 above by the result of Step 6. So we would do 0.0041667 divided by 0.2833612, which gives us 0.0147046.
  8. Now add the monthly interest rate from Step 3 to the result we just got; that’s 0.0041667 plus 0.0147046. This gives us 0.0188713.
  9. Finally, multiply the principal we started with by the result we just got in Step 8. So we multiply $20,000 times 0.0188713, which gives us $377. This is the monthly payment you would need to make on this loan, with this interest rate and payment term.

Still with us? Good. You can see that this is a bit of a process, and there’s plenty of room for error here, which is why a simple online tool makes things so much easier. But, if you want to make sure you’re getting a fair deal and paying what you should be paying, then this process will give you the same results as any good online calculator.

A tan 2023 Nissan Pathfinder Rock Creek is shown from the rear at an angle on a dirt trail.

Step Three: Important Things to Remember

Any change to the numbers specified throughout this will impact your payments in a variety of ways. For example, if you could pay off that same $20,000 loan with 5% interest in 48 months, then you’d need to make payments of more than $460 each month. You’d pay less overall by paying it off sooner, but you need to make sure you can afford the higher monthly payments. Similarly, if you had more of a down payment or trade-in and reduced that to a $15,000 loan, with 5% interest and a 60-month term, then your payments would only be about $283. This is why a big down payment, with a smaller principal and lower interest rate for the remainder, helps you pay less overall and have lower monthly payments.

Posted in Nissan Financing