How to Use the Auto Loan Payment Calculator
Using our car loan calculator is simple:
- Enter the price of the car you want to buy
- Provide the annual interest rate (APR) offered by your lender
- Choose the loan term (typically 1-5 years)
- Optionally, add your down payment, trade-in value, and sales tax for more accurate results
- Click Calculate to see your monthly payment and total loan cost
The calculator instantly shows your monthly payment, total interest, and total amount you'll pay over the life of the loan.
What is an Auto Loan?
An auto loan (or car loan) is a type of short-term personal loan used for purchasing a car. It works like any other secured loan granted by a financial institution. Once you take a loan, you have to make a repayment each month on the principal and the interest.
The main difference between the standard short-term loan and an auto loan is its purpose — in the case of an auto loan, it is strictly defined. Another difference is that car loans have a built-in collateral — the purchased car. So, if you cannot pay the installments and, as a consequence, cannot pay back the borrowed money, the car is legally repossessed to the lender.
Car loans differ from mortgages because you do not need any real estate collateral to apply for them. Also, the loan granting process is less complicated and shorter in the case of auto loans. Another difference is the payback period length: in the case of mortgages, it could be as long as 30 years, and the typical term of a car loan is between 12 to 60 months.
How Does a Car Loan Work?
Well, it is easier than you think. Once you find the car you want to buy, you usually know its price. Based on the calculations using that price, you should be able to work out the amount you need to borrow. In the simplest case, it is the price of the car minus the money you have.
A car loan allows you to borrow a fixed sum of money you need to buy the vehicle. After the purchase, you must repay it in fixed monthly payments, usually over one to five years (12-60 months). The interest rate is typically constant over the lending period and depends on how much you borrow. The general rule of thumb says that the smaller amount you borrow, the higher the interest rate is.
Types of Car Loan Financing
When considering taking a car loan to buy a new car, it is worth knowing that there are two main types of financing on a car loan:
- Direct lending is a typical loan taken from a bank or credit union. You sign a purchase contract with a car dealer and then use the money borrowed from the direct lender to make the appropriate payments.
- Dealership financing: a car dealer initiates the process of taking a loan and doing all the necessary paperwork. In dealership financing, you usually cannot choose the lending institution – usually, the loan is granted by so-called captive lenders associated with a car manufacturer.
Note: To promote sales, car manufacturers offer attractive financing opportunities via dealers. Usually, it is more profitable to buy a new car with dealership financing, as it is significantly cheaper – interest rates in such loans can be as low as 0.5%, 1%, or 1.5%.
Car Loan Payment Formula
Our car finance calculator uses the following formula to calculate the monthly payment:
Monthly payment =
(loan amount) × (interest rate / 12) / (1 − (1 + (interest rate / 12)) ^ (-loan term))
The interest rate is given for a period of one year.
The loan amount is calculated as follows:
Loan amount =
price of the car − money you have − (trade-in value × (1 − sales tax))
where:
- price of the car — the final purchasing price
- money you have — the cash you have to spend on a car
- trade-in value — the value of your current car
- sales tax — sales tax rate
Car Loan Calculator - Example of Calculations
Let's assume that you want to buy a five-year-old Jeep Wrangler worth $20,000. You also have a car – an old Chevrolet Silverado worth about $7,000, and $1,500 in your savings account. The sales tax in your state is 10%, and the interest rate on the car loan is 4%. You want to take a three-year loan.
Step-by-step calculation:
- Estimate the amount of money you will get for your old car (trade-in value minus tax):
$7,000 - $7,000 × 10% = $6,300 - Calculate the amount of money you need to borrow (new car value minus trade-in and savings):
$20,000 – $6,300 – $1,500 = $12,200 - Use the formula to compute the monthly payments:
($12,200) × (4% / 12) / (1 - (1 + (4% / 12))^(-36)) = $360.19 - Calculate the total cost of your loan:
$360.19 × 36 – $12,200 = $766.93
The answer is $360.19 per month, with a total interest cost of $766.93 over 3 years.
Pros and Cons of Taking an Auto Loan
Pros
- Auto loan is a very simple product. It is easy to arrange and understand.
- Car loan is flexible – you can choose the payback period from one to five years.
- Thanks to a car loan, you become a legal owner of the car just after the purchase. So, contrary to leasing contracts, you can immediately modify the car exactly as you desire.
- From the seller's perspective, you are a cash buyer, so you have a stronger position in price negotiations.
Cons
- If you do not have a good credit score, you will not get a car loan.
- In the case of a car loan, the monthly installments may be higher than in other forms of financing the purchase (e.g., leasing).
- Contrary to the leasing agreements, you are responsible for the service and all vehicle repairs.
- Due to the car depreciation, your car will be worth less each year. When you decide to sell it, it will be considerably cheaper than at the time of purchase.
Frequently Asked Questions
Does a bank give you cash for an auto loan?
It depends, but usually, a bank gives money to the buyer directly. You should ask your bank for information on a specific auto loan you're interested in before purchasing a vehicle.
Can I refinance my auto loan?
Usually yes, you can refinance your auto loan if your bank approves. Refinancing means replacing your current loan with a new one, often with better terms like lower interest rates or extended repayment. It can help reduce monthly payments or save money over the life of the loan.
How do I calculate my auto loan?
To calculate your auto loan:
- Calculate the amount you need to finance your car
- Find the annual interest rate offered by your bank on auto loans
- Decide on the loan term (typically 1-5 years)
- Use the formula: Monthly payment = (loan amount × monthly rate) / (1 - (1 + monthly rate)^(-term))
- Remember to consider any extra costs like provision for the dealer
Can I afford a new car?
Determining whether you can afford a new car depends on your financial situation. Consider factors like your monthly income, expenses, and savings goals. A general rule is that your car payment should be around 15% of your monthly income. Ensure you can comfortably cover this expense without compromising your other financial priorities.
How much do I pay back on a $50,000 auto loan?
The amount you pay back on a $50,000 auto loan depends on:
- The interest rate; and
- The loan term.
For example, with a 5% interest rate and 36-month term, you have to pay back $53,947.61 (total payment including interest).
What is a good interest rate for an auto loan?
A good interest rate for an auto loan depends on several factors including your credit score, the loan term, whether the car is new or used, and current market conditions. Generally:
- Excellent credit (720+): 3-5%
- Good credit (680-719): 5-7%
- Average credit (640-679): 7-10%
- Below average credit (<640): 10%+
Should I buy or lease a car?
The decision between buying and leasing depends on your needs:
Buy if you:
- Want to own the vehicle outright
- Drive more than 12,000-15,000 miles per year
- Want no mileage restrictions
- Plan to keep the car for many years
Lease if you:
- Want lower monthly payments
- Like to drive a new car every few years
- Drive less than 12,000 miles per year
- Don't want to worry about selling the car later