Make sure to review all the variables you are plugging in the car loan calculator !

Use a car loan calculator to run scenarios and figure out your exposure but don't be fooled by the monthly payment. There is a lot more to it. Let's review all the variables.

When financing a vehicle, we risk of falling in what I call the monthly payment trap. In recent years, car makers and dealers have aggressively marketed low monthly payments as opposed ...... to the cost of the vehicle !!

It seems pretty obvious but before making a financing deal make sure you know how much you are paying for the vehicle !! Then use a car loan calculator to check the monthly payment suggested by the lender. This means you also have to review the term and the interest rate. In some loan-purchase arrangements you also have to worry about the residual value much like in a lease.

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The loan term is important. You may benefit from a low monthly payment but if the term is too long the unpaid capital balance may end up being less than the resale value of the car. This is certainly not a desirable situation.

The interest rate is .......... very important ... we all know that. But we often fail to monitor the evolution of the rate over the term of the loan. If rates go down we may have an opportunity to refinance at a much better cost. Again, use a car loan calculator and play with the interest rate, the impact of a one point reduction is huge.

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In lease contracts and loan-purchase agreements the residual value has a major impact on the monthly payment. Use a car loan calculator and run a few scenarios. Manufacturers and dealers often use a high residual to make the monthly payments attractive. If this is the case make sure you are not responsible to cover the residual value at the end of the contract. Otherwise you may have an unpleasant surprise at maturity !

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