Car payment calculation

- [Instructor] So let's think a little bit about how you might likely pay for a car. Now, there's really three ways to pay for a car. One, you might just have enough cash in your bank account and you could pay for it outright. Another model is that you could rent the car, you're leasing the car, but probably the most common is that someone pays off the car in installments, they take out a loan, and then they pay back the principle on the loan, the amount that you borrow plus interest over some period of time. And so that's what we're going to focus on in this video. So what we have here is just some numbers that might go with a car purchase. So the first we see here is the car price, $20,000. Now it's worth clarifying what would have to go into this. So let's say you go to the dealer and you negotiate a price of say, $20,000. It turns out that you're going to have to pay more than $20,000 because of tax, and that sale is gonna be sales tax depending on where you live. Oftentimes it might be as much as 10% more than that. So if you negotiate a car price of say, $20,000, all of a sudden, when it's time to sign the documents, you might see $22,000. So the car price, or the amount that you're gonna have to put up in order to take that car home, and you're gonna have to put that up between the amount that you contribute plus a loan, this is going to be price of car, so car plus tax, and there are, they might throw on some other fees there like destination fees, et cetera, et cetera. So definitely don't just assume that whatever, just the price of the car is is what you're going to have to pay. You're gonna have to pay that plus some other fees. But let's assume that this is, this $20,000, let's say, plus tax and fees is this 20,000. Then you have to think about, well, how much are you going to be able to put up versus how much are you going to have to borrow? And so in this scenario right over here, the purchaser has $4,000 to put towards the car. And so there's 16,000 left that they are going to have to borrow. So this is the loan amount and this interest rate, and we'll see in a second how the interest rate affects the payments that you would have to make. But we're gonna assume a 5% interest. And that's going to change depending on your credit score, depending on what's going on with interest rates and the broader economy and the broader market. And then last but not least, the loan term. This is how long it's going to take for you to pay down the loan, in this case, this is 36 months, and that tends to be on the shorter end of the range that people usually do when they're trying to get a loan for a car. But let's think about what type of a payment this will result in. And there are videos on Khan Academy that go into the math. You could actually calculate it yourself, but lucky for us, there's also payment calculators throughout the internet, including on Khan Academy, where when you do the exercises associated with this content, you'll be able to have access to exactly this payment calculator right over here. But let's just use it, so it says loan amount, well, that's going to be the $16,000 over here, $16,000, that's what we are borrowing, the interest rate, and this is just going to, a number between 0 and a 100. So whatever number we put in there, that's gonna be that many percent. So if we say 5%, and then the loan term, we could give it in years or months. 36 months is going to be 3 years. And we could see it immediately calculated, $479.53 cents per month. And so it's really important to use one of these payment calculators. Think about, can you afford $479 and 53 cents every month? Factor it into your broader budget, make sure that you're good for that. But let's think about how these different variables might change depending, or how your payment might change depending on how these other variables might change. So the most obvious one is probably the loan amount. The more that you have to borrow, the more your payment's going to be. So let's say that somehow you, let's say you only put $2,000 down, then you're gonna have to borrow $18,000. You can see that increased your monthly payment. Now let's take that back to $16,000. We're back at $479.53 cents. Now let's think about the loan term. If instead of paying it in 3 years, I pay it in 4 years, well that does reduce my monthly payment. Now you have to be very careful here, 'cause remember, you're paying for a whole other year and that whole time, not only are you paying down the loan, but you're paying interest for another year. So more of that money is going to go to interest. Now, you might say, let's go to, let's go to 5 years. And you could go to, let's go to 6 years. And the longer you go, your payment is gonna go down. But you have to keep in mind that you're paying that fairly large amount for a longer and longer time period. And usually, the longer the loan term, the interest rate goes up as well, because the bank or whoever is lending to you is taking on more risk. But let's go back, what's typical is usually 3 to 5 years. Let's stay at 4 years, right over here. But let's see how interest rate affects it. Let's say instead of a 5% interest rate, you had an 8% interest rate. Well now all of a sudden you're paying a good bit more. If you had to go to a 10% interest rate, now over 4 years, you're only doing a little bit better than when you had a 5% interest rate paying over 3 years. So as you can see, all of these variables really matter. But the key point here is, use these types of calculators, these payment calculators to figure out what you can afford. I recommend don't take out something that's gonna be more than 4 or 5 years. Sometimes people get into a scenario where they actually owe more on their car than their car is worth because their car is depreciated so much. And in general, psychologically, it's always nice to pay something off sooner than later. By doing that, you're likely to get a lower interest rate and you're going to have to pay less in total interest. And then you're going to free up more cash sooner because you've paid it off sooner.