How Do I Calculate a Monthly Payment Budget?

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - February 15, 2018

To calculate a monthly auto loan payment, a borrower divides the total cost of the loan – principal plus interest – by the loan term. Knowing if that payment fits into their budget only takes a few simple calculations.

Understanding Monthly Payments

The only person who can truly say what a monthly payment amount could be is a lender. Potential buyers can make an estimate before seeking an auto loan by using an online payment calculator. To understand how it works, we must first know what goes into a payment.

Three things determine the monthly payments on an auto loan:

  • Principal – the original amount financed, based on vehicle selling price plus taxes and fees (unless paid out of pocket).
  • Interest – the fee a person pays for money borrowed. A borrower’s interest rate varies based on credit score and lender. Typically, higher credit scores mean lower interest rates.
  • Term – the length of time it takes to pay off a loan. Loan terms are always stated in months, typically ranging from 36 to 84.

Budgeting for an Auto Loan

Lenders don’t want their borrowers to go broke buying a car. It’s in the best interest of everyone involved if a person can successfully complete their auto loan. To ensure a monthly payment fits into a potential borrower’s budget, lenders use two ratios: debt-to-income and payment-to-income.

Debt-to-income ratio

A debt-to-income ratio (DTI) refers to the percent of a person’s income promised to regular monthly bills. This is the total amount of all payments such as mortgage, loans, and credit cards, divided by gross (pre-tax) monthly income. When determining loan approvals, lenders include an estimated monthly loan and insurance payment into the equation. They typically don’t want a borrower’s DTI to exceed 40 to 50 percent of their income.

Payment-to-income ratio

The payment-to-income ratio (PTI) refers to how much of a person’s income the combined total monthly auto loan plus auto insurance payment accounts for. To find PTI, divide the estimated car and insurance payment by gross monthly income. Lenders usually cap borrower PTI between 15 and 20 percent. As a potential buyer, it’s a good idea to multiply gross monthly income by 0.20 to find an estimated maximum payment that fits into a budget.

Borrowers can calculate these ratios themselves to find out what an ideal monthly payment estimate is for their budget.

When it’s Time for Financing

Once you’ve determined what your budget can handle and it’s time to find a lender, make sure you’re looking for the right lender for your situation. If you’re struggling with bad credit, no credit, or bankruptcy, not every lender will be able to help.

CarsDirect can help point you in the right direction from the start because we work with a nationwide network of special finance car dealers that have lending resources to help people struggling through credit issues. There’s never any cost or obligation, simply fill out our online auto loan request form to get started today.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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