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Cost of a Car Loan When you are buying a new car, there are many things you must consider. One major consideration is the loan. Banks and other lending institutions charge you interest for the privilege of using their money to buy a car. A down payment of 10% to 20% is generally required. The down payment is the money you pay for the car before you finance. It reduces the amount you will have to borrow. To compute the amount of interest you will have to pay, use the interest formula I = prt where I is the interest you pay, p is the principal(amount you borrow), r is the interest rate, and t is the time (length of the loan in years). Once you finance you not only have to pay back the money you borrowed, you also have to pay the amount of interest the loan company charged you. Let’s say you bought a car priced at $15,000. You made a 15% down payment and financed the rest at 5% for 3 years or 36 months. $15.000 (15%) = 15,000 (.15) = $2250 <---down payment price of car - down payment = $15,000 - $2250 = $12750 <---amount financed I = prt or Cost of Loan = (amount financed)(interest rate of loan)(time in years) = ($12,750)(.05)(3) Cost of Loan = $1912.50 Add that amount to the amount financed to find the amount that has to be paid for the car in payments. $12,750 + $1912.50 = $14,662.50 Find the amount of each payment by dividing the amount above by the number of months the loan is to run. $14,662.50 / 36 ~ $407.29 <---Payment Amount To find the final cost of the car, add the purchase price and the interest charged for the loan. $15,000 + 1912.50 = $16912.50 So that $15,000 car will actually end up costing you $16912.50 by the time it is paid for. Cost of a Car Loan Now you try a couple............. 1. You are looking a car that costs $19,500. You are financing at 6% interest for 3 years with a 10% down payment. How much will the new car cost? What are the payments? 2. You have fallen in love with that cherry red convertible Mustang. It sells for $32,900. If you finance for 5 years at 9% interest, how much will you save by paying 20% down instead of 10%? 3. What are the payments for a $16,000 car, financed for 48 months at 5% interest with a 15% down payment?