Simple Math Can Yield Monthly Loan Payment
|   Sunday, September 14, 2014
Every year, about this time, various lending outlets and the Federal Reserve, put out a lot of information about interest and rates for the rest of the year.

It is about this time that the new loan factor appears in car showrooms across the country. Why is this important to you? Let's say you plan to shop over the weekend for a new car. You do your search; figure out which options you would like to have; figure out which manufacturers' showrooms you want to visit, and the models you want to see but do you have an idea of how much your loan will cost every month.


One of the pieces of information that appears in the automotive world is what you could call the loan factor. This year that actual loan factor is $13.85. It appeared just last week in various financial and automotive publications and websites. The loan factor is the amount you will spend per thousand dollars of loan for a new- or used-car loan.

Interestingly, the old factor of $20 per thousand that has been in use for many years has finally succumbed to the reality of the financial marketplace. It now reflects the fact that interest rates have dropped considerably. The problem is that many sales people still use the $20 per thousand shorthand. It would make more sense, if they want to use a round number, for them to drop to $15 per thousand, as it would be closer to reality.

Granted, salespeople would probably love to keep the loan factor with which they are familiar and which frankly makes them more money but it makes little sense and really does fly in the face of reality. It is also more than a little humbling when the finance manager announces to the customer, "Oh, the figuring your salesman used was a little high. Your real monthly rate for your finance should be..." And, then the manager announces a figure substantially lower than the one you were quoted.

It's not the salesperson's fault. It is the information he has been given by the sales manager, usually, or sometimes the general sales manager. Since they get a percentage of each sale their staff writes and delivers, it follows that they would use the highest numbers they can find so they stand a chance of getting more for the car and that translates into a bigger paycheck.

Now that you have the right information, you can figure out what it will cost you monthly to pay off your loan, using the loan factor of $15 per thousand of loan. The reason it is not the $13.85 figure is because $15 is just a round figure and is easier to use.
Let's say you are opting for a loan because you don't have the $16,000 you need for the car you are buying in the bank or in cash in your pocket. So, what would your monthly payment be? Here's how you figure it out:

Divide the amount of the loan by $1,000
Take the result multiply it by the loan factor of $15
Take the result as your monthly payment

Using our $16,000 loan as our example, let's see what the monthly payment is:

$16,000 divided by $1,000 equals 16
16 times $15 equals $240
Your monthly payment is approximately $240

Now that you've evened the playing field a little, you should have an easier time with your car-shopping.
PHOTO GALLERY
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