Province or state
Dealer price
Term
Down payment
Trade in
Payment frequency
Sales tax %
Interest rate %
Finance

$0 Bi-Weekly

Rate 4.99% APR
Dealer price
$30,000
Down payment
-$0
Trade in
-$0
Sales tax
$0
Finance amount
$0
Interest charge
$0
Total obligation
$0

Car Loan Guide

How do car loans works?

Car loans are like any other type of loan on the market. You borrow money from a lender to purchase a car from a private individual or a car dealership.

The money the lender gives you is called the principal of the loan, to which you add the interest, which is the cost of the loan often referred to as the cost of borrowing.

Interest on car loans can be compounded monthly, bi-weekly, and sometimes weekly depending on your preferences.

Compounding interest is a general finance term you will hear a lot. It simply means that you only pay interest on that remaining balance of your loan.

This is why at the beginning of your car financing you will pay the highest interest, because that's also when remaining balance is the highest.

As you pay off the loan, the interest portion of your car loan payment diminishes, because the balance is also diminishing. And since you are making the same periodically payment (monthly or by-weekly), the principal portion increase.

How much should I put as a down payment on a car?

Unlike a mortgage or car lease, financing a car doesn't always require a down payment.

But, you can use a down payment to lower your monthly payments.

Some people try to pay off their car loan faster by making early payments, which effectively reduce the total interest charge, but not the monthly payment.

Once you have signed the car finance agreement, the periodic payment amount is set and you can't change that.

If you are trying to pay off your car loan payment as early as possible, it best to put a down payment if you can, to first lower your payment. Then you will have some breathing room to save money and reduce the principal later.

In the advent that you suddenly begin to struggle financially and can't pay off your loan as fast as you though, at least you will have lower payment to deal with.

However, if putting a down payment will wipe out your savings, and make you financially vulnerable against unforeseen unfortunate events, you should definitely keep it in your bank account.

Another reason to not put a down payment is the opportunity cost of maybe of business opportunity that might slip by if you don't have cash.

How often should you make your car payment? Monthly vs Bi-Weekly Car Loan Payments

Car loan payments are usually made bi-weekly or monthly. Although you could save interest by choosing bi-weekly payments over monthly payment, the savings are minimal.

For example, using our auto loan payment calculator above, we will keep everything identical except for the payment frequency.

Dealer price: $50,000
Term: 96 months
Down payment: $0
Trade in: $0
Interest rate: 20% APR (very unusual, for demonstration purpose only)
Scenario 1:
Payment frequency: Monthly
Total interest charge: $50,575
Scenario 2:
Payment frequency: Bi-Weekly
Total interest charge:  $50,394

That's only $181 savings over 96 months if you choose bi-weekly car payments instead of monthly car payments.

This means that you should choose the payment frequency that fits your lifestyle better.

If you want more time to prepare for your car payment, the monthly payment option can be advantageous. This gives you some peace of mind of not missing car loan payments, which can negatively affect your credit score.

What's the formula for Calculating a car loan payment?

To calculate car loan payments, all banks and lenders in the world will use this formula:

P =
L x ( 1 - r)
r - r
(1 + 1)
where
r =
1
1 - i
and:
P is your periodic car loan payment
n is the number of payments
i is the periodic interest rate (APR* / number of periods in a year)
*APR stands for "Annual Percentage Rate". It's the standard for quoting interest rates.