Calculate Monthly Payment for a Car Loan

What is the formula to calculate the monthly payment for a car loan?

How can we determine the monthly payment for a $20,000 loan with a 12% APR to purchase a car?

Formula to Calculate Monthly Payment

To calculate the monthly payment for a loan, we can use the formula for the monthly payment on an amortizing loan. The formula is:

M = P * (r * (1 + r)^n) / ((1 + r)^n - 1)

When taking out a loan to buy a car, it's essential to understand how to calculate the monthly payment to manage your budget effectively. In this case, let's consider a scenario where you borrowed $20,000 to purchase a car and need to repay the loan in 40 months with an APR of 12%.

The formula to calculate the monthly payment involves the principal amount (P), monthly interest rate (r), and total number of payments (n), which represent the loan duration in months. First, we calculate the monthly interest rate by dividing the APR by 100 and then by 12 to get the rate in decimal form.

After finding the monthly interest rate, we can substitute the values into the formula to determine the monthly payment. By evaluating this expression using a calculator or spreadsheet, we find that the monthly payment for the $20,000 loan over 40 months at a 12% APR is approximately $664.06.

It's crucial to consider the monthly payment amount when taking out a car loan to ensure it fits within your budget and financial goals. By understanding the calculation process, you can make informed decisions when planning for loan repayment.