What Determines Your Monthly Car Loan Payment?


What Makes up Your Monthly Payments?

Knowing how much your monthly car loan payments are going to be is a crucial part of the car buying process. Not only will it allow you to make an affordable budget, but it will also deter you from buying a car that will make your car payments unmanageable. Many Canadians aren’t sure about how monthly payments are structured and the many factors that make up a monthly car loan payment. In this article, we’re going to go over all of the factors that make up your monthly car loan payments. 

Your Credit Score

Your credit score is one of the most important factors that make up monthly car loan payments. If you have struggled to repay debts in the past and your credit score has taken a negative hit because of it, lenders are going to see you as a high-risk borrower. In order for lenders to feel comfortable lending you money as a person with bad credit, they’re going to want to charge you a high-interest rate. On the other hand, if you’ve always repaid your debts on time and in full, you’ll have a high credit score and lenders will be confident in your ability to pay off your loan. For the lender, it’s strictly a matter of risk assessment and management. 

handing a credit card to a mechanic in front of car

The Down Payment

Much like when you get a mortgage on a house, when you buy a car, the amount of money you use as a down payment will directly affect your monthly payments. The more money you’re able to pay upfront on the loan, the less you’ll have to pay on your monthly payments. Dealerships sometimes do offer 0 down financing, but this is something you need to ask yourself if it’s really beneficial because this will increase your monthly payments. Using a down payment on a car loan also means asking the lender for less money and can mean them seeing you as less of a risk, meaning you may get a more favourable interest rate. 

The Length of the Loan Term

The third factor that affects your monthly payments is the amount of time you intend to take to fully pay off the loan. The longer the loan term, the less you’re monthly payments will be, but this will mean you spend more in the long term on interest. If you really wanted a long loan term you can get financing for terms of up to 96 months but this typically isn’t recommended. Most experts suggest getting a car loan term for no longer than 72 months (6 years), and ideally if you can afford it, to opt for a 48 month (4 year) loan. 

highway shot from above

The Interest Rate

Your interest rate is mostly based on your credit score. Simply put, an interest rate is paying the lender to borrow money from them. If they feel like it’s a risky loan for them because you have bad credit, expect to be charged a high-interest rate. If you’re able to get a car loan with bad credit, you may be able to get refinancing at a better rate if you’re able to consistently make your payments on time and in full.

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