Before committing to a car purchase, every consumer should consider calculating the exact amount (or as close to it as possible) that they are going to pay on a monthly basis – whether it is a lease or a loan. If you are taking out a loan from a financial institution instead of financing through a dealer, then you may want to do so before signing any papers.
The best time to calculate your monthly payments or take out a loan is right after negotiating the price. At this point, you are very close to buying your car and all you need to do is make sure that your monthly payments are exactly what you want them to be. Find out how to do that below.
No matter who finances your car purchase – a dealer, bank or credit union – you should have all your numbers sorted out, including the deposit, monthly payments and term length.
First, you need to figure out your down payment, which is usually 10 per cent of the purchase price or higher. You should then find out what your interest rate will be or, at least, assume what it will be. Once you have all the numbers, subtract your down payment from the negotiated price to obtain the amount you will owe. For instance, if the retail price with all the options included is $28,100, but you have managed to negotiate it down to $25,100, then subtract your down payment from that amount and use the following chart to calculate your monthly payments, with interest and tax added:
MSRP + Options = $28,100
Down Payment Amount = $25,100 x (10 per cent / 100) = $2,510
Annual Interest = 7.4 per cent
Monthly Interest = (7.4 per cent / 100) / 12 = 0.0062
Term = 60 months
Monthly Payment (Plus Interest) = $22,590 x (0.0062 / (1 - (1 + 0.0062)^-60 months) = $451.80
Tax = 13 per cent
Monthly Payment (Plus Interest and Tax) = $451.80 + ($451.80 x (13 per cent / 100)) = $510.53
The results of your calculations will not reflect your payments exactly, but they are still a good way of measuring what to expect. You can also use a loan calculator in our free dealer cost report, which looks like this:
NOTE: It will not take into account your negotiated price!
Before you agree to lease a car, make sure you know what your deposit and monthly amounts will be. The recommend term length is 36 months or less, while the annual mileage limit tends to be 20,000 kilometres. First, check how much the car you want will cost after the lease is over on CanadianBlackBook.com as shown here:
Then subtract the future value from its current price to obtain the amount your deposit and monthly payments will have to cover. After that, deduct the down payment (10 per cent or higher) from the result and divide by 36. Finally, account for interest and tax.
Here is a table that demonstrates what your calculations should look like:
MSRP + Options = $28,100
Amount Covered = $25,100 - $18,620 = $6,480
Down Payment = 10 per cent
Down Payment Amount = $6,480 x (10 per cent / 100) = $648
Term = 36 months
Monthly Payment (Minus Interest and Tax) = ($6,480 – $648) / 36 = $162
Money Factor = 0.00125
Interest = ($25,100 + $18,620) x 0.00125 = $54.65
Monthly Payment (Plus Interest) = $162 + $54.65 = $216.65
Tax = 13 per cent
Monthly Payment (Plus Interest and Tax) = $216.65 + (216.65 x (13 per cent / 100)) = $244.82
These calculations will not reflect your actual payments exactly, but they should serve as an accurate indicator of what to expect.
Once you have calculated your monthly payments and deposit, visit your preferred financial institution and obtain a loan or head straight to the dealer and settle the agreement.
Updated on March 26, 2013
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