Understanding Car Financing
Understanding car financing is the goal of this lesson. You will become familiar with some of the basic terms used when financing a car and some of the basic mathematics involved as well.
In this lesson, you will learn
- what a down payment, the amount to be financed and the deferred payment price are
- how to find the down payment from a percent, a trade-in, cash, or both
- how to find the total of all monthly installments and the deferred payment price
- how much more than the sticker price you pay when you finance a car
Car Financing Terms: Down Payment and Deferred Payment Price
Most people who buy a car cannot pay cash at the time of purchase, so the common thing to do is to make a down payment and fill out a car loan application form.
A down payment means that you can trade in an old car, or give some money out of your pocket, or both.
The amount left will be financed and paid in monthly installments.
The sum of the down payment and all monthly installments is called the deferred payment price.
The deferred payment price is usually more than the sticker price. The difference, deferred payment price − sticker price, is the extra money you pay for borrowing.
Using the wrong number of monthly installments. Count the payments the problem gives you: 48 payments means multiply by 48, not 60. If the loan is given in years, multiply the years by 12 (4 years = 48 payments).
The sticker price of a car is 20000 dollars and you make a down payment of 10%. What is the amount to be financed?
Show answer
18000 dollars. Down payment = 20000 × 0.10 = 2000, so the amount to be financed = 20000 − 2000 = 18000.
Example 1: A 25% Down Payment and 60 Monthly Payments
Let's take a couple of examples to illustrate:
The sticker price of a car is 15000 dollars. You make a down payment of 25% and you are asked to make 60 monthly payments of 197 dollars.
Question #1: What is the amount to be financed?
Down payment = sticker price × 25%
Down payment = 15000 × 0.25 = 3750
Amount to be financed = sticker price − down payment
Amount to be financed = 15000 − 3750 = 11250 dollars
Question #2: What is the deferred payment price?
Deferred payment price = down payment + all monthly installments
If a monthly installment = 197, then 60 monthly installments = 60 × 197 = 11820
Thus, deferred payment price = 3750 + 11820 = 15570
The car was worth 15000 and you ended up paying 15570 dollars!
In Example 1, how much more than the sticker price did you pay?
Show answer
570 dollars. 15570 − 15000 = 570.
Example 2: A Cash Down Payment Plus a Trade-In
The sticker price of a car is 35000 dollars. You make a down payment of 9000 dollars and your trade-in value is 8000 dollars. You are asked to make 48 monthly payments of 398 dollars.
Question #1: What is the amount to be financed?
Down payment = trade-in value + 9000 = 8000 + 9000 = 17000
Amount to be financed = sticker price − down payment
Amount to be financed = 35000 − 17000 = 18000 dollars
Question #2: What is the deferred payment price?
Deferred payment price = down payment + all monthly installments
If a monthly installment = 398, then 48 monthly installments = 48 × 398 = 19104
Thus, deferred payment price = 17000 + 19104 = 36104
The car was worth 35000 and you ended up paying 36104 dollars!
In Example 2, what is the total of all 48 monthly installments, and how does it compare with the amount financed?
Show answer
19104 dollars, which is 1104 dollars more than the 18000 dollars financed. 48 × 398 = 19104 and 19104 − 18000 = 1104.
Worked Example: Trade-In, Cash and 36 Monthly Payments
- Find the down payment: trade-in + cash = 3000 + 2000 = 5000 dollars.
- Find the amount to be financed: 22000 − 5000 = 17000 dollars.
- Find all monthly installments: 36 × 520 = 18720 dollars.
- Find the deferred payment price: 5000 + 18720 = 23720 dollars.
- Compare with the sticker price: 23720 − 22000 = 1720 dollars.
Amount financed: 17000 dollars. Deferred payment price: 23720 dollars. You pay 1720 dollars more than the sticker price.
A car costs 18000 dollars. You pay 4000 dollars down and make 24 monthly payments of 625 dollars. What is the deferred payment price?
Show answer
19000 dollars. 24 × 625 = 15000, and 4000 + 15000 = 19000.
Summary
- A down payment can be a trade-in, cash, or both.
- Amount to be financed = sticker price − down payment.
- All monthly installments = number of payments × monthly payment.
- Deferred payment price = down payment + all monthly installments.
- Deferred payment price − sticker price = the extra money you pay for financing the car.
Test Yourself: 10-Question Quiz
Now check what you learned. Every answer is explained, and each time you play you get new questions.
Quiz complete!