Quick Payment and Interest Calculations for Car Buying

With so many good financing offers out there, thought I would throw a quick reference guide together that you could print out and take to the dealer. Here goes:

1. (MF) money factor to approximate percentage rate: Multiply lease factor by 6,400.

2. Low APR financing monthly payment per $1,000 financed:

72-months 0% APR - $13.89 per $1,000 financed.
60-months 0% APR - $16.67 per $1,000 financed.
48-months 0% APR - $20.83 per $1,000 financed.
36-months 0% APR - $27.78 per $1,000 financed.

72-months 1.9% APR - $14.71 per $1,000 financed.
60-months 1.9% APR - $17.48 per $1,000 financed.
48-months 1.9% APR - $21.65 per $1,000 financed.
36-months 1.9% APR - $28.60 per $1,000 financed.

72-months 2.9% APR - $15.15 per $1,000 financed.
60-months 2.9% APR - $17.92 per $1,000 financed.
48-months 2.9% APR - $22.09 per $1,000 financed.
36-months 2.9% APR - $29.04 per $1,000 financed.

72-months 3.9% APR - $15.60 per $1,000 financed.
60-months 3.9% APR - $18.37 per $1,000 financed.
48-months 3.9% APR - $22.53 per $1,000 financed.
36-months 3.9% APR - $29.48 per $1,000 financed.

3. Here is one the car dealers don’t ever advertise: Total interest paid per $1,000 borrowed:

72-months 3.9% APR - $123.18 per $1,000 financed.
60-months 3.9% APR - $102.29 per $1,000 financed.
48-months 3.9% APR - $81.65 per $1,000 financed.
36-months 3.9% APR - $61.26 per $1,000 financed.

72-months 2.9% APR - $90.73 per $1,000 financed.
60-months 2.9% APR - $75.46 per $1,000 financed.
48-months 2.9% APR - $60.33 per $1,000 financed.
36-months 2.9% APR - $45.34 per $1,000 financed.

72-months 1.9% APR - $58.87 per $1,000 financed.
60-months 1.9% APR - $49.04 per $1,000 financed.
48-months 1.9% APR - $39.27 per $1,000 financed.
36-months 1.9% APR - $29.56 per $1,000 financed.

If your car costs $20,000 and you received 3.9% APR for 72-months you will have paid $2,463.60 in interest ($123.18 * 20).

Quick note on leases. Now that you know the total interest paid on the special financing terms, if you decided to lease on the spot with out doing your homework at least do this quick check before you sign any papers.

Multiply your total payments.
Add your down payment. (Should be zero or very small)
Add your trade in allowance.
Add any rebates and incentives.
Add in the residual value of the car. (Should be as high as possible)

This is you total price of the car. Does it make sense? Is it high compared to traditional financing? If you are doing a 36-month lease, look at what your total cost of the car would be using traditional financing using the charts above. For a car that costs $20,000 financed at 3.9% for 36 months you will pay a total of $21,225.26. If you do your calculation above for your lease and it turns out to be $25,550, you know you have a terrible deal.

Word of warning here. Just because the numbers match the good financing does not mean you have a good deal. If you are at the dealer and reading this and you don’t know why, then take the information down and tell the dealer you will call him with your acceptance within 24 hours. Go home and walk through the calculations on this site and determine if your lease meets the proper factors for being a good deal.

If you are arithmetic challenged, post the information in the discussion board or on any other car buying discussion board and wait for responses.

Never rush a lease unless you are already familiar with each factor before you go into the dealer.

Good luck!

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By now this is probably well known so I won’t spend to much time on this. If you want the 0%, 2.9%, or 3.9% car financing deals, you will usually have to be a Tier 1 credit customer. Banks have slightly different classifications but here is a rough guide of tiers for credit scores:

Tier 1 - 720-850 (Will always Qualify for 0%, 2.9%, and 3.9% APR deals)

Tier 2 - 700-719 (Most of the time will Qualify for 0%, 2.9%, and 3.9% APR deals)

Tier 3 - 675-699

Tier 4 - 620-674

Tier 5 - 560-619

Extremely Poor credit below 559

With a lot of competition between car makers a score of 700 or above can typically qualify for the best financing rates.

How Do I Check My Score?

There are plenty of credit score checking services that you can find online. New rules require each reporting agency to give you a free credit report once a year, however, the report does not usually contain the score. To get the score you typically have to sign up for a trial service which is free for 30-days, just make sure to cancel the service before the free trial is up.

Some places to get free credit reports/scores:

Non-Sponsored

Bank of America, freecreditreport.com, experian, equifax, and transunion.

Sponsored:

(I have used all services above and they all work good. Just watch your free trial period if you plan on not using the service after the free period.)

If it is bad, what can I do?

This is a whole separate topic, but a few things that can have a quick effect are:

Lowering any debt that is close to the limit of your cards. If you can’t afford to pay off the debt, move some around to other cards you have to spread out the total debt. Any card that is near the limit carries a heavier weight that works against you.

Pay bills on time. This one is easy and usually counts for about 30-35% of your overall score. If you are having trouble, contact your creditors and make arrangements for easier payment plans. Typically they will work with you and they will not report the late payment if you have a pre-arranged deal. Make sure to get that in writing so if they do report the late payments you can hold them to their word.

Call companies that have reported late payments. If you see on your report that Visa reported a late payment, call them and ask if they can remove it. Sometimes it works if you can talk to them with respect and don’t have a long history of late payments. If that does not work, try writing letters to the appropriate credit departments. It does not hurt and sometimes you can get them removed.

Pay down any over the limit fees. If you have any cards over the limit, this will have a large impact on your score. Pay them down, even if it is only to the limit.

There are many good articles on credit management. If you fall under 600, I encourage you to do some research and see what things you can change to start improving your score.

So, in summary if you are going for the 0%, 2.9%, or 3.9% financing terms, check your credit score and call the dealer and ask them what the credit score requirement is. This will save you some time if you know you don’t qualify and you can consider finding alternate financing methods.

In my posts you will find a lot about car leases. Why, because it is one of the easiest places for consumers to get ripped off. I hope you will take the advice below and do the research necessary when leasing a car.

This example comes from a post I fund at edmunds.com in the town hall section of the website from a buyer that has done excellent homework:

—————————————————

“If I can get out to try to negotiate a 36 month lease tomorrow (Sept 4), can someone tell me if the following is a fair deal, or is it unrealistic?

They have a 2007 Q7 (3.6 Premium) with the following options:
Sunroof, Infotainment Nav, 4 zone climate, 3rd row seating, 19″ wheels, rear side airbags, convenience package. It says the MSRP is about $56000, invoice would be around 51700.

I read on here that there is an offer available for $4000 below invoice, bringing the cap cost to $47700.

I read on here the residual with Audi Care is 0.52, which would be $29154.

I read on here that if you take the $4000 below invoice, you can’t get the low MF, so would a MF of 0.00165 (~3.96%) be a reasonable expectation?

Using an online lease calculator, I calculate the following:
Capitalized Cost: 47719 (56010 MSRP minus discount)
Residual Value: $ 29154.00 (after 36 months)
Depreciation Fee:$ 515.69 - part of lease payment
Lease Fee: $ 124.92 - part of lease payment
Monthly Payment :$ 640.61 without tax
Usage Tax: $ 19.22 over full loan (3.00 % of 18565.00)
Total Monthly Payment: $ 659.83 including tax

So is a $640/mo payment (without tax) a reasonable expectation for this vehicle? Were any of my assumptions wrong? Is it unlikely that I can reach this deal in

Charlotte, NC where there are no other local dealers for competition?

If I take the 0.00014 MF and negotiate $500 over invoice, the payment would seem to be about $10/mo higher so I guess I could go that way too. I qualify for tier 1, but is $500 over invoice reasonable for the 2007s?”

—————————————————-

So, lets breakdown his offer step by step.

1. The price of the car. He has spent time researching the current incentives as well as the current invoice with listed equipment. The invoice for this car is around $51,700 as he found plus an additional incentive to sell this particular model $4,000 below invoice. So, his assumption of a reasonable cost of $47,700 is accurate.

*Note: Higher demand cars or limited production cars often do not sell at invoice. You can check particular data on what a fair price should be on many sites. I highly suggest kelly blue book or edmunds as two reliable resources. Also, you can check the Saturday ads in you newspaper to gauge what dealers are letting cars go for. It is good to compare the two sources.

Additional Resources:

KBB.com
Edmunds.com
Cars.com

2. Expected Residual: This one is tough. To find the exact residual of your car you have to do digging. This buyer was able to find it reading through posts. Another source is looking at what the average value of the car you are planning to buy is worth after 3,4, and 5 years. This can be done using KBB.com, but be cautious of any model changes that may alter the results.

What you are trying to determine is what the bank considers the value of the car after the loan term. For the Audi above, the bank considers the car to retain 52% of its value after 36-months. Some cars are higher and others are lower. Typically American cars such as Ford, depreciate faster then foreign automakers. The better your car holds its value the less you are going to pay for the lease.

Cars that hold value well are typically strong reliable cars with good resale values like the Honda Accord. You can also try doing a search for residual value “insert car”. Things should pop up.

*Note: Why is residual value important? In a lease you are paying monthly the depreciation of the car plus a money factor fee on that amount. The faster your car loses value the more your payment will be. You could have two cars that have large price differences but cost the same per month to lease. That is why you should only lease cars that have good residual values (hold their value better). Cars that don’t, buy them, it will be cheaper in the long run.

Also, for this same reason the typical optimal lease is 36-months. After that, cars really start to lose value and this affects your entire payment structure. Never buy a car on a 60-month lease.

Additional Resources:

MSN Auto Advice

3. Money Factor: This is the cost you pay to lease the car otherwise known as interest. The Money Factor is expressed in a four or five digit decimal number such as .00210. To convert this to an equivalent interest rate simply multiply the Money Factor by 2,400.

The Money Factor of .00210 is equal to a 5% interest rate. The length of the loan does not matter when doing the conversion. To go the other way simply divide by 2,400 and you can determine what Money Factor equals what interest rate.

The buyer again has shown great knowledge and done homework. The money factor should be in line with current financing rates. Typically, if a special is running on interest rates, some special is running on Money Factors. The buyer has determined that a fair rate given his credit and the market conditions is .00165 or just under 4%. This is probably a fair rate for the term when taking the rebate. If the rebate was not taken, then expect a much better lease factor. If you don’t know which to take please see this post.

Additional Resources:

Leaseguide.com
Swapalease.com
BankRate.Com

(Note: Leaseguide.com offers a pay product to help with a lease purchase. I firmly believe you do not need this product. While I am sure it is very well done, there is enough free information to help you if you are willing to take the time to learn. If the fee is worth it to you and you want to save time, then by all means purchase the product, but I truly think you can save your self some cash. I do not make any referral fees if you purchase the program, just my two cents.)

Now you are ready to calculate your lease:

The three components of a lease are your Money Factor, Price of the Car (cap cost), and residual (or depreciation).

For the deal above we know:

Money Factor is .00165
Price of Car is 47,719 (cap cost)
Depreciation is about .52 or 52%.
Residual is equal to (MSRP X Depreciation) = 29,125.20.

We know that the expectations above are fair from researching the cost of the car along with rebates available, market conditions for interest rate, and the expected depreciation of the car.

Here is how you compute your lease payment:

There are two parts, the depreciation fee and the finance fee:

Depreciation Fee:
Depreciation Fee = (Cap Cost - (MSRP X Depreciation) )/ term Or ( Cap Cost - Residual ) / term.
For the car above: (47,719 - (56,010 X .52)) / 36 = $516.49

Lease Fee or Finance Charge:
Finance Charge is equal to: Cap Cost + Residual X Money Factor(This is an approximate way to calculate the fee with out using accounting formulas)
Finance Charge = 47,719 + 29,125.20 X .00165 = 126.79

Your Lease Payment before taxes:
Lease payment = Finance Charge + Depreciation Fee = 126.79 + 516.49 = $643.28

Due to rounding and slightly different calculations the numbers vary slightly than calculations from the buyer, but the buyers calculations seems to be in line. Tax is every state is different, so make sure you know what you are suppose to pay for tax and exactly what is taxed. I would say the buyer in this case has come up with a great offer. In a follow up post, the buyer took the offer to the dealer and they accepted.

If you spend the time and do your homework, a lease can be very good option. If you don’t understand the calculations above and can’t do them on your own, don’t lease the car. If you must, find someone that can help you with this. There are to many places to add in profit and still make the deal look good to the buyer.

To close, here are just a few places they can add un-reasonable terms that you should be aware of:

Residual: Be careful on this one. They will always tell you the residual is set by the bank, this is true, but is it what they are giving you? If all the information you have tells you something different then what they are giving you, don’t buy the car. Go back home do more research to make sure you are right and then go to a different dealer.

Second warning: you want the residual to be as high as possible! This seems strange, but remember that most of the lease payment is the difference between the residual value and the Cap Cost. The smaller the number the lower your lease payment.

Unless you plan on buying the car after the lease, any down payment or money towards lowering the residual value is wasted. Think about this one. The bank says a car is worth 25K at the end of the lease, why would you want to pay money to bring this value down to 20K when you just plan to give it back? That means you gave the bank 5K you did not need to give them. Lets look at it in terms of rent for a house. What if a landlord told you the rent is $800 per month, but you need to put a down payment that is equal to 10% of the house price. This down payment you don’t get back when you leave, would you do it? I hope not, same with a lease.

One last thing on residual. It is always MSRP X Depreciation. Be careful, they may try to show you a residual value that is your cap cost X Depreciation (This assumes you are not paying more than the MSRP). If they calculate your payment based on a lower car price it lowers the residual value which is the opposite of what you want to do.

Lease Factor: They may not want to share this with you. If they don’t, you will have to do your own calculations. I would suggest if they don’t show you the Lease Factor then leave.

Monthly Payments: My biggest rule, do not negotiate the monthly payment. The payment is a function of depreciation, lease factor, and car price. You can negotiate all these factors and if you do well the monthly car payment will fall where you expect it to.

Mileage and other fees: Check what they are and make sure you will not be stuck with a big fee at the end of the lease. Mileage caps add up fast when you are charged .15-.25 per mile. If you are over by 10K miles you will be looking at a $2,500 penalty.

Be careful.Good luck, do your homework, and you will not get ripped off.

Please leave comments with your strategies for others to read!

If there is one thing to know when you go into the dealer to buy a car it is this:

You are there to negotiate the price of the car!

One more time: You are there to negotiate the price of the car - period - end of story.

You are not negotiating your monthly payment.

Your monthly payment is a mathematical function based on the price of the car. Yes the dealer can add padding here to make extra profit, but if you have done you homework you will know what type of loan you should qualify for. Better yet, if you are taking advantage of special financing rates there really is no way to add padding with out you knowing.

You are not negotiating your down payment.

Plan to pay the typical fees (license, registration, etc). Anything beyond that you should already have set in your mind and planned out ahead of time. The only need for a down payment is to reduce your monthly payment. Again, it is a simple mathematical calculation using a loan calculator or amortization schedule. References on what and how to use these tools can be found in older posts on this site. The only other reason for a large down payment may be due to poor credit. If this is your reason, know it going in and learn what the banks will expect of you.

You are not negotiating the term of your loan.

This is something you should know up front. The longer you extend the term the lower the payment, but it comes at higher interest and an increase cost to the overall car purchase. You should determine what works for you before you go into the dealer. When numbers start flying, they can throw a curve ball to you that sounds good, but in reality is worse for you.

You are not negotiating your trade in……ok maybe some negotiation here.

In reality most dealers are only going to give you low blue book trade in value. If they give you more than that, your probably losing somewhere else. Key here is don’t expect much above the low blue book number and be mad when that is what they offer to you. Part of the negotiation tactics are to miss-guide you with insulting offers and put you on the defensive. This clouds your judgment on other issues and typicaly allows them to win the negotiation. If you want to get more for your trade in, sell it. I have even set up arrangements with car dealerships that if I can’t sell my car in a certain period they will still give me the same offer. Needles to say, I have never had to take the car back to the dealer. Usually the offer is so below market price that even a 10-15% increase in the price they offer you will still be far below market that you will sell your car in no time.

I highly suggest reading “Dealerships Rip You Off With The “Four-Square,” Here’s How To Beat It” from the consumerist.

It illustrates eloquently how this piece of paper is used to guide you through incorrect negotiation. It is designed to focus your attention on the points such as I have listed above. Over the last five years I have bought a few cars and helped many others of my family. On all of them, I have avoided using the paper. One dealer, however, tried to use the paper so I grabbed it and wrote the following:

no trade

0 - down

Price equal to 10K below sticker

$1 per month

Dealer sign here___________

I put them on the defense and consequently did not buy a car from them.

I can not stress enough that preparation is your weapon. If you come prepared with your facts and know the math behind your offer, you can then concentrate on the price only. You will walk out from the dealer with a good deal and not have to burn time or your hard earned money.

In my opinion you get burned less playing with fire, but before you go out and strike a match, here are some very quick tips to control the flame at the dealer:

1. First and foremost know your total car cost! Even if you don’t understand a single thing about a lease, do yourself a quick check and multiply the payments by the term, add any incentives or rebates, add any down payment, and add the cost of the car at the end of the lease (residual value).

Payments *(term) + Incentives + Rebates + Down payment + Amount due at end of lease (Residual value) = Total cost of car.

Why is this important? Simple, you can compare this to doing traditional financing. In most cases, the lease of the car should cost close to financing the car. Lease factors and interest rates vary slightly, but it is still a good gauge. If they feed you lines that lease rates are not good because banks are only offering special interest rates, then maybe you should not lease. This is almost always not true, if the banks are running good interest rates they probably have good lease rates.

2. Come prepared with traditional financing costs! This is important for step 1. Calculate the cost of the car using interest rates from 1-6% and 36-60 months. If you don’t know how to do this search our site for loan amortization or download our free loan tool for MS excel. Simply calculate the payment for 1%,2%,3%,4%,5%,and 6% and in any incentives and rebates, and down payment.

Now you have something to compare. If the total cost of the lease in step 1 is close to the total cost of the car is step two at 5%, then you know your car if purchased at the end of the lease would be similar to buying the car at 5% interest. If the buy financing offered by the dealer is 0% for this loan period then you know you have work to do as the lease is a lot more expensive.

3. OK, so you compared total cost and they equal the appropriate interest rate, am I getting a good deal? This is where leases become confusing for the average consumer. The answer is probably not if you plan on turning in the car at the end of the period. Why? Leasing in other words is financing the depreciation of the car. We have all heard the expression “the car loses value the minute you drive it off the lot”. This is true, usually in the neighborhood of 20%, this loss in value is what you are paying for in a lease. So, if you pay more than the expected loss of the car of the term you choose you are not getting a good deal.

4. Don’t put a lot of money down! This is the single easiest way to set your wallet on fire. Remember in tip #3 that you are financing the estimated depreciation. If you put money down, the dealer can put the money towards the residual value of the car and give you a low payment. If you trade you car in at the end of the lease you just lost your down payment.

5. Ok what is the proper amount to put down? In my opinion nothing. It is a lease, however, we can’t always qualify for that so do a simple check. Calculate the following: payments*term + down payment + rebates and incentives. Look at that number and then ask yourself is this how much the car is going to loss value in over the term I am looking at? For example, if you do this math on a 30K car that you want to lease for 36 months and the value equals 20K, then something is wrong. Either you payment is to high, you down payment is to high, or they did not give you the rebates. Warning, when doing this compare keep in mind that you pay interest in the lease based on the lease factor so your numbers may be off a little depending on the lease factor they gave you. If you did step one and two, then you know you approximate equivalent interest rate and you should be able to determine a reasonable amount to factor in.

6. Leasing is financing the depreciation of the car! I know this has been said before, but it is so important to understand this. There is no need to have a residual value at the end of the lease that is below what you think the value of the car is going to be at the end of the term. Your payment should be the lowest you can get while keeping the residual value high or above the estimated value of the car at the end of the lease. This seems the opposite of what you would thing, right? Well, if your residual value is higher than the car is worth at the end of the lease, then you are in effect renting the car for less while you are driving it which is the object of a lease (very important: remember all you checks in step 1 and 2, it is you check that they have applied all amounts).

7. In most cars, 36-month leases are optimal. Why? It has to do with depreciation. Any longer and your paying for a steeper rate of decline and it does not make sense to do that.

8. Never do off - term loans (i.e. 39-months, 52-months, etc)! These are designed to build in better profit margins while looking better to the consumer. I have never seen one in that is better then a traditional term loan. They might be out there, but if you go down that path be sure you know how to fully calculate everything on the loan because if you don’t you are probably better off pulling all your cash out of your wallet, handing it to the dealer, and then leaving.

Before you lease always know at least how to do the tips above and please do more homework. Leases are very easy for dealers to make incentives and down payments disappear. I firmly believe, that with out leasing the car dealers would be in far worse condition profit wise today.

Be wise, do you homework and happy leasing! Send questions out to the public in the comments!

Much more to come on this topic, please subscribe. Thanks!