When you consider how you wish to pay for a vehicle, your options generally include borrowing or leasing
(You may have the resources to pay cash for a vehicle but let's assume your options are limited to leasing or borrowing.) One of the first things you will want to know -- a dealer's salesperson will ask you -- is, "How large of a monthly payment can I afford?"
The size of your monthly payment depends on the loan amount and loan terms. To calculate your loan amount, subtract the net trade-in value
of your current auto and any down payment
from the purchase price. If you receive a rebate
, subtract that amount from the purchase price too.
For example, assume the purchase price of the vehicle is $20,000, including fees and taxes. The dealer gives you $5,000 on your trade-in
vehicle and offers a $500 rebate. Your lender requires you to make a down payment of $1,000. Since you owe $2,000 on your current vehicle, the net trade-in value is $3,000. If you subtract $3,000, $1,000 and $500 from the $20,000 purchase price, your loan amount is $15,500.
Your calculated monthly loan payment should be less or equal to the amount that you think you can afford. Keep in mind, however, that additional costs of owning a car -- insurance, registration and maintenance, for instance -- are not included in calculating a monthly loan payment.