$20 for every $1,000

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Point of Interest

Because of the effects of COVID-19, car buyers will need to think a little differently when securing financing. While interest rates have dropped, creditworthiness requirements have not.

COVID-19 has certainly made things interesting across all industries, leading many of us to get creative about our thinking for the things we want to do. One area that has dealt with a ton of recent shakeups is lending for car purchases. Interest rates have changed to be more favorable, but the requirements to secure a loan — and your obligations that come with that like monthly car payments — have not.

If you’re thinking about buying a new car, you may be looking for an estimate for your monthly car payment. A general rule of thumb is one that calculates $20 for every $1,000 of principal. Based on today’s average APR rates (the cost of borrowing), you can expect to pay about $20 for every $1,000 you borrow on a 60-month loan. If you get a 60-month loan on a $10,000 car, expect to pay around $200 per month. You will want to use an auto loan calculator to get the exact amount, and that number will also be heavily dependent on the interest rate you are approved for.

What components are considered to make an auto loan payment?

  • Price of the car — When you buy a car that is more expensive, you will, in turn, owe more money. Without even looking at interest, buying a more expensive vehicle increases the size of your monthly payments. When you add in interest, it’s calculated as a percentage of the price of the car. This means that the more expensive a car you buy, the higher those interest costs will be as well.
  • Interest — Interest is the premium you pay to the lender on the money you borrow to buy your new car. You will be given an interest rate by the lender that will be determined by several factors, including your credit score and overall financial picture. The higher the interest rate, the higher your monthly payments will be. The lower the rate, the less you will need to pay each month.
  • Loan term — Your loan term is the length of time you are given to pay the loan back. The longer your term, the lower your monthly car payment will be, because a longer loan term spreads the money owed out over more payments. However, you will end up owing more interest over the life of the loan with a longer loan term.
  • Credit score — One of the biggest determinants of your monthly car payments is your credit score. Your score tells the lender how risky it is for them to extend credit to you. The higher your score, the lower your interest rate should be, and therefore, the lower your monthly payments will be.

How do loan payments work?

Things seem fairly simple from the borrower’s end. The lender gives you a dollar amount that you owe each month, and you are required to pay that until your loan is fully paid off. When the money gets to the lender, it becomes a little more complicated. A portion of the money you pay is applied by your lender toward your principal (the amount you borrowed), and another portion of the money is applied to your interest. At the beginning of your loan, more of the money goes toward interest and less toward the principal. As the loan progresses, more goes toward the loan. As the borrower, all you need to worry about is making your payments on time.

Interest rates and credit scores

One of the main factors when determining your monthly car payments and how much you owe overall on the loan is your credit score. Your credit score tells a lender how likely you are to default on your loan. The higher your credit score, the less likely you are to default, and the less risky the loan is to the lender. The lower your score, the riskier the loan is to the lender.

The riskier a car loan is, the more money the lender needs in return from you to make to ensure the risk is worth the reward. This means that if you have a lower credit score, you will probably pay a higher interest rate on your loan. If you have a great credit score, though, the lender is okay charging you less for your loan. It’s not a perfect system, but it is the system that all auto lenders use. As you make payments and your credit improves, you can refinance and get a better rate.

The duration of loans

A decision you will need to make when customizing your auto loan is how long you want the loan term to be. Generally, you’ll have loan options between a year and five years, though some lenders offer longer terms. The shorter your loan term, the higher your monthly payments will be. While that sounds like a negative, you will save significantly on interest over the life of the loan. You will also have your car loan paid off sooner.

If you select a longer-term loan, your monthly car payments will generally be lower. However, it will take you longer to pay off the car, and you will pay more interest over the life of the loan. This also means you will be carrying debt for longer, which will lower your credit score.

Don’t forget about the other expenses

Taxes

As with any other purchase, you will be paying sales tax when you buy a new car. Depending on what the sales tax rates are in your area, this could amount to a lot of money. For example, if you live somewhere with a 7% sales tax rate and you buy a $20,000 car, that’s an additional $1,400 you’ll need to pony up to secure your purchase.

Processing fees

One of the more interesting parts of the new car buying is the processing fees. Many dealers have fees like documentation or dealer prep fees. You may be able to negotiate to skip some of these — but not always. What you won’t be able to escape, under any circumstances, are the state registration fees. These are low in some states, but it may be a percentage of the value of the car in others, which could amount to several hundred dollars.

Gas

Whether you buy or lease a new car, you have to pay for gas, but not all cars or gas tanks are created equally. Make sure that you look at fuel mileage for the cars you’re interested in and calculate your average monthly fuel costs. If you’re transitioning from a small car to a large vehicle, this cost may be much higher than what you’re used to.

Car insurance

You’ll need to get car insurance on your new vehicle, and the cost may be higher than expected. Remember, newer cars are worth more money, which means you may pay more for insurance. If you are getting something sporty or with a lower safety rating, you may also end up paying more. Call your insurance company before you make the purchase to get a quote on what coverage will cost.

Jason Lee

Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skillsets with the rest of the world.