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.


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.

Understanding car financing with a couple of concrete examples

Let's take a couple of examples to illustrate:

Example #1:

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?

Question #2: What is the deferred payment price?

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

Deferred payment price = Down payment + all monthly installments

If a monthly installment = 350, 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!

Example #2:

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?

Question #2: What is the deferred payment price?

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

Deferred payment price = Down payment + all monthly installments

If a monthly installment = 398, then 60 monthly installments = 60 × 398 = 23880

Thus, deferred payment price = 17000 + 23880 = 40880

The car was worth 35000 and you ended up paying 40880 dollars!

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