How Car Loan Payments Are Calculated
A car loan works like any other instalment loan — you borrow a fixed amount and repay it in equal monthly instalments that cover both principal and interest. The loan amount is the car price minus your down payment and any trade-in value. Understanding the full cost of a car loan helps you negotiate better and avoid overextending your budget.
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Formula
Car Loan Calculator
Calculate monthly car loan payments, total cost, and interest paid.
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Worked Example
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FAQs
Should I take a longer loan term for a lower payment?
A longer term reduces monthly payments but increases total interest and may leave you owing more than the car is worth (negative equity) for the first few years. Cars depreciate quickly — a 72 or 84 month loan is often not advisable.
How does a trade-in reduce my loan?
The trade-in value of your current vehicle is applied as a credit against the purchase price of the new car, reducing the amount you need to borrow. This reduces both your monthly payment and total interest paid.
What is a good interest rate for a car loan?
Car loan rates vary significantly based on credit score, loan term, and whether the car is new or used. In 2024–2025, new car loan rates ranged from around 5–8% for good credit. Used car loan rates are typically 1–2% higher. Dealer financing is often not the best rate — compare with your bank or credit union.