How the monthly car payment is calculated
Auto loans are amortizing loans: every payment is the same, and each one covers that month's interest plus part of the balance. The payment is calculated with the standard annuity formula:
M = P × r ÷ (1 − (1 + r)−n)
where P is the amount financed (price − down payment − trade-in), r is the monthly rate (APR ÷ 12) and n is the number of monthly payments.
Worked example
You buy a $30,000 car, put $5,000 down and finance $25,000 at 6.9% APR for 60 months. The monthly payment is about $494. Over five years you pay roughly $4,630 in interest.
How to lower the cost of a car loan
- Shorter term: a 48-month loan has a higher payment than a 72-month loan but usually far less total interest, and you build equity faster.
- Larger down payment: borrowing less reduces both the payment and the interest, and protects you from owing more than the car is worth.
- Get pre-approved: compare a bank or credit-union rate with the dealer's financing before you negotiate.
- Negotiate the price, not the payment: a low monthly payment can hide a long term or a high price.
What is not included
Sales tax, title and registration fees, dealer fees and insurance vary by state and are not included. If you roll them into the loan, add them to the vehicle price.
Frequently asked questions
What is a good APR for a car loan?
It depends on your credit score, the loan term and whether the car is new or used. Borrowers with excellent credit get the lowest rates; used-car loans and longer terms usually cost more. Compare at least two or three offers.
Is a 72- or 84-month car loan a bad idea?
Long loans lower the monthly payment but increase total interest, and you may owe more than the car is worth for years. Use the calculator to compare total interest across terms.
Does the trade-in reduce the amount I borrow?
Yes. The trade-in value is subtracted from the price, just like a down payment. If you still owe money on the trade-in, subtract only your equity.
Can I pay off a car loan early?
Most auto loans allow early repayment, which saves interest. Check your contract for any prepayment penalty.
Last updated November 10, 2026