Auto Loan Calculator

How Auto Loan Payments Are Calculated

Auto loan payments are calculated using the same amortization formula as mortgages. The loan amount (vehicle price minus down payment and trade-in value) is combined with the interest rate and loan term to determine a fixed monthly payment. Each payment covers both principal and interest, with the interest portion decreasing over time as the balance shrinks.

A larger down payment reduces the loan amount and monthly payment, and also helps you avoid being "underwater" (owing more than the car is worth). Cars depreciate about 20% in the first year and roughly 15% each subsequent year, so starting with equity protects you financially.

Frequently Asked Questions

What is a good interest rate for a car loan?

Auto loan rates depend heavily on your credit score, the loan term, and whether the car is new or used. As of 2024, borrowers with excellent credit (750+) can expect rates around 5-6% for new cars and 6-8% for used cars. Fair credit (630-689) typically sees rates of 9-13%. Shorter loan terms generally come with lower rates.

Is a longer loan term better because of lower payments?

While a 72- or 84-month loan has lower monthly payments, you pay significantly more in total interest. A $35,000 loan at 6% for 48 months costs about $3,700 in interest. The same loan at 72 months costs about $5,700 in interest. Longer terms also increase the risk of being underwater on the loan. Financial experts recommend keeping auto loans to 48-60 months maximum.

Should I take a dealer loan or get pre-approved at my bank?

Always get pre-approved through your bank or credit union before visiting the dealership. This gives you a baseline rate to compare against the dealer's offer. Dealers sometimes mark up the lender's rate, adding 1-2% to earn a commission. Having a pre-approval also strengthens your negotiating position and separates the vehicle price negotiation from the financing negotiation.