How to Calculate Car Loan Payments

Buying a car means understanding the true cost—not just the sticker price. Your monthly payment depends on the loan amount, interest rate (APR), and loan term. This guide breaks down the formula, shows real-world calculations for 48/60/72-month loans, and explains how down payments and trade-ins affect your total cost.

The Car Loan Payment Formula

Car loans use the same amortization formula as mortgages and personal loans. The standard formula is:

Where:

• P = Principal (loan amount after down payment and trade-in)
• r = Monthly interest rate (APR ÷ 12 ÷ 100)
• n = Number of monthly payments (loan term in months)

Breakdown: What’s in Each Payment

Every car payment covers two parts:

1. Interest – Cost of borrowing, calculated on the remaining balance
2. Principal – Amount reducing your loan balance

In early payments, most goes to interest. By the end, most goes to principal. This is called amortization.

Step-by-Step: Calculate Your Monthly Payment

Let’s walk through a realistic scenario. Say you’re buying a $35,000 mid-size sedan:

Step 1: Determine Your Loan Amount

Step 2: Convert APR to Monthly Rate

If your APR is 6.5%, the monthly rate is:

Step 3: Set Your Loan Term

For a 60-month (5-year) loan:

Step 4: Apply the Formula

Step 5: Calculate Total Cost

Real-World Examples: 3 Loan Terms Compared

Same $35,000 car, same 6.5% APR—but watch how loan term affects your total cost.

Example 1: 48-Month (4-Year) Loan

Takeaway: Higher monthly payment, but saves $1,126 in interest compared to 60 months.

Example 2: 60-Month (5-Year) Loan

Takeaway: Most popular choice—balanced monthly payment and reasonable interest.

Example 3: 72-Month (6-Year) Loan

Takeaway: Lowest monthly payment, but costs $1,511 more than 48 months—and you’re likely underwater on the loan (owing more than car’s value) for years.

APR vs. Interest Rate: What’s the Difference?

Car dealers often advertise an "interest rate" separate from the APR. Here’s what each means:

Interest Rate

The base cost of borrowing money—what you’d pay if there were no additional fees. For example, a 6% interest rate means you pay 6% annually on the principal.

APR (Annual Percentage Rate)

APR includes the interest rate plus all fees:

• Origination fees
• Documentation fees
• Dealer processing fees

Example: A 6.0% interest rate might have a 6.5% APR once fees are included. Always compare APRs when shopping for loans—it’s the true cost.

Hidden Costs in Car Loans

Your monthly payment is just one expense. Budget for these additional costs:

1. Sales Tax

Most states charge 6-10% sales tax on the vehicle price. Some lenders let you roll this into the loan (increasing your loan amount), while others require it upfront.

2. Registration and Title Fees

Expect $200-$800 depending on your state. These are typically due at purchase and can be rolled into financing.

3. Insurance

Lenders require full coverage (collision + comprehensive) until the loan is paid off. Average cost: $1,500-$2,500/year.

4. Depreciation

New cars lose 20-30% of value in the first year and 15-25% annually after. With a 72-month loan, you may owe more than the car’s worth for years—this is called being "underwater."

5. Prepayment Penalties

Most car loans allow early payoff without penalty, but some lenders (especially subprime) charge fees. Always read the fine print.

5 Strategies to Lower Your Car Payment

1. Make a Larger Down Payment

Putting 20% down reduces the loan amount, lowers your monthly payment, and keeps you from going underwater. A $7,000 down payment on a $35,000 car drops your monthly payment from $684 to $549 (60 months, 6.5% APR).

2. Improve Your Credit Score Before Applying

A higher credit score qualifies you for lower APRs. Improving from "good" (700) to "excellent" (750+) can drop your APR by 2-3 percentage points, saving thousands over the loan term.

3. Choose a Shorter Loan Term

A 48-month loan costs more monthly but saves $1,100+ in interest compared to 60 months. If you can afford the higher payment, it’s the smarter long-term choice.

4. Shop Around for the Best Rate

Get quotes from your bank, credit unions, and online lendersbefore visiting the dealership. Credit unions often offer the lowest rates (0.5-1% lower than banks). Having pre-approval gives you leverage to negotiate.

5. Consider a Used Car

A 2-3 year old car with low miles costs 30-40% less than new but retains most of its useful life. Lower purchase price = smaller loan = lower payment.

Common Car Loan Mistakes to Avoid

Mistake #1: Focusing Only on Monthly Payment

Dealers love to ask "What payment can you afford?" because they can stretch the loan term to 84 months and hide the true cost. Always calculate total interest and total cost—not just the monthly number.

Mistake #2: Rolling Negative Equity Into a New Loan

If you owe more than your current car is worth (negative equity or "being underwater"), dealers may offer to roll that debt into your new loan. This increases your loan-to-value ratio and costs you thousands in extra interest.

Mistake #3: Skipping the Trade-In Math

Dealers often inflate the trade-in value but raise the car price or interest rate to compensate. Use online tools like Kelley Blue Book or Edmunds to know your trade-in’s real value before negotiating.

Mistake #4: Ignoring Gap Insurance

If you total your car in the first few years, standard insurance only pays the car’s current value—which may be less than your loan balance. Gap insurance covers that difference. Essential for loans with less than 10% down.

Mistake #5: Not Budgeting for Total Ownership Costs

Your car payment is just one expense. Add insurance, gas, maintenance, and registration to get the true monthly cost. A realistic budget prevents you from becoming car-poor.

Frequently Asked Questions

What is a good APR for a car loan in 2026?

APRs vary by credit score and market conditions. Current averages:

• Excellent credit (750+): 4-6%
• Good credit (700-749): 6-8%
• Fair credit (650-699): 9-12%
• Poor credit (<650): 14-20%+

Shop multiple lenders—rates can vary by 2-4% for the same credit profile.

How much should I put down on a car?

Financial experts recommend 10-20% down payment. This reduces your loan amount, lowers monthly payments, and helps you avoid going underwater. For vehicles over $30K, aim for 20%.

What’s the best loan term length?

48-60 months (4-5 years) is ideal. Shorter terms (36-48 months) save on interest but have higher monthly payments. Avoid 72-84 month loans—you’ll likely owe more than the car is worth for years.

Can I pay off a car loan early?

Yes, most car loans allow early payoff without penalties. Paying extra principal each month or making lump sum payments saves significant interest. Check your loan terms for prepayment penalties (rare but possible with subprime lenders).

Should I finance at the dealership or through a bank?

Get pre-approved from your bank or credit union first, then let the dealer try to beat that rate. Credit unions often offer the lowest rates (0.5-1% below banks), but dealer incentives (0% financing) can sometimes be better.

What is LTV ratio and why does it matter?

LTV (Loan-to-Value) ratio is your loan amount divided by the car’s value. Below 100% means you have equity; above 100% means you’re underwater. Lenders prefer LTV under 80% for best rates. To calculate: (Loan Amount ÷ Vehicle Value) × 100.

How do extra payments affect my loan?

Extra principal payments reduce your loan balance faster, saving on interest. For example, adding $100/month to a $31,550 loan at 6.5% (60 months) saves $1,200+ in interest and pays off the loan 8 months early.

Is 0% APR financing a good deal?

Sometimes—but read the fine print. Dealers often require excellent credit (750+) and may not allow negotiation on the car’s price. If you can negotiate a $2,000 discount and get a 3% APR from your bank, that may be a better deal than 0% at full price.

What’s included in my monthly car payment?

Your monthly payment covers only principal and interest. Insurance, registration, gas, and maintenance are separate. Some lenders offer payment protection insurance (covers payments if you lose your job), but it’s optional and expensive.

How does a trade-in affect my loan amount?

Your trade-in value is subtracted from the car’s purchase price, reducing your loan amount. Example: $35,000 car - $5,000 trade-in = $30,000 financed. If you owe money on your trade-in, that debt is subtracted from the value (or added to your new loan if you’re underwater).

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