When purchasing a new car, chances are you'll need financing to do it. Roughly 70 per cent of new car purchases are done through car loans. You don't go out there and buy a car. You go out, get a car loan, and then use the money to buy a car.

Unless you plan to pay cash for a new car, you'll need to find a lender who would be willing to lend you the money you need for your set of wheels. But car loans aren't as easy as they sound. There are monthly payments and car loan rates to think of, both of which can take a hefty chunk out of your monthly budget. So how do you calculate a car loan payment and find out how much you can afford?

There are four things you need to consider when you calculate a car loan payment. To calculate a car loan payment with the greatest of accuracy, you need to be acquainted with the following terms: interest rates, loan principal, and the loan period. Of course, these are only three of the things that you will assuredly encounter when you calculate a car loan payment. There are several more factors but these are the three most important.

Calculate a Car Loan Payment - What is Loan Principal?

When you calculate a car loan payment, one of the first things you need to consider is the loan principal. In finance, the term refers to the original amount of money borrowed or the debt owed. You can calculate a car loan payment based on the loan principal and the percentage of interest.

Payments for a loan are usually done in monthly installments. When you calculate a car loan payment, the amount of money still owed after the debt has been partially paid is also called the loan principal, the remaining loan principal or outstanding balance. A large percentage of your payments in the first few months are used to pay off the interest charges instead of the loan principal amount. This is an important fact to keep in mind when you calculate a car loan payment. After the initial months, the monthly payments would then be equally divided between the interest and the principal until the debt plus interest is paid off.

Calculate a Car Loan Payment - What is Interest Rate?

Another important factor to consider when you calculate a car loan payment is the interest rate. The term refers to the amount of money charged for a loan, excluding the original amount owed. In simple terms, interest is the 'rental' price which you give to the lender as payment for the use of his money.

Calculate a Car Loan Payment - What is Loan Period?

Loan period is simply the duration of time agreed upon by both the borrower and the lender. When you calculate a loan payment, the loan period is important since it could affect the loan rates.