Loans
How To Calculate Auto Loan Payment
A car loan is an amortizing loan like any other: a fixed payment retires the balance over the term. The car-specific wrinkle is the trade-off between payment size and total cost, and the effect of a trade-in and sales tax on the amount actually financed.
Quick Answer
M = P x r / (1 - (1 + r)^-n)
- P
- Amount financed, price less down payment
- r
- Monthly rate, annual rate divided by 12
- n
- Term in months
- M
- Fixed monthly payment
Finance the price minus the down payment and trade-in, at the monthly rate and for the number of months. A 35,000 car with 5,000 down, financed at 7.5% over 60 months: P = 30,000, r = 0.00625, n = 60, and M = 30,000 x 0.00625 / (1 - 1.00625^-60) = 601.14 a month. The total paid is 36,068, so the interest alone is 6,068.
What Is Auto Loan Payment?
An auto loan lets you spread the price of a car over a fixed term. The lender buys the car from the dealer and you repay the lender with interest. The amount financed is the price plus tax and fees minus your down payment and any trade-in value, and that net figure, not the sticker price, is what the payment formula operates on.
The payment formula is the standard amortizing loan formula, the same one used for mortgages and personal loans. Because the loan is secured by the car, the rate is usually lower than an unsecured loan would carry, but a longer term raises the total interest quickly and can quietly cost more than the lower payment saves.
The core trade-off is term against total cost. Stretching 30,000 from 60 to 72 months lowers the monthly payment but adds a full year of interest and keeps you in the loan longer, often past the point where the car is worth more than the balance still owed. The payment looks friendlier while the deal gets worse.
A down payment does double duty. It reduces the amount financed, so less interest accrues over the term, and it reduces the risk of being upside down, where you owe more than the car is worth. Being upside down matters most if the car is written off or you need to sell it early.
Sales tax is charged on the full price but financing it spreads the tax over the term, so you end up paying interest on the tax as well as on the car. Where cash allows, paying tax and fees up front keeps them out of the loan and saves a small but real amount of interest.
Dealers sometimes quote a monthly payment rather than a rate, which hides the term and the total cost inside a comfortable-looking number. Always convert a quoted payment back into a rate and a total before agreeing, because the same payment can describe a five-year loan at a fair rate or a seven-year loan at a poor one.
The formula ignores dealer add-ons, extended warranties, insurance products and the effect of a thin credit file on the offered rate. It describes the core loan only. Those extras are usually financed too, and each one quietly enlarges the amount you pay interest on.
Because interest is charged on the declining balance, paying extra or choosing a shorter term cuts the total interest sharply. On 30,000 at 7.5% over 72 months the interest is 7,344, while the same loan over 48 months costs far less, which is the clearest argument for the shortest term you can comfortably afford.
The payment is not the cost of the car. Insurance, fuel, tyres, servicing and depreciation all sit outside the loan and over five years can rival the finance charge itself, so the affordability question is bigger than whether the monthly figure fits this month's budget.
Formula
M = P x r / (1 - (1 + r)^-n)
P is the amount financed, r the monthly rate and n the term in months.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| P | Amount financed | currency | Price less down payment and trade-in. |
| r | Monthly rate | rate | Annual rate divided by 12. |
| n | Term in months | count | Length of the loan in months. |
Interest = M x n - P
Total payments minus the amount financed is the interest paid.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| I | Total interest | currency | Cost of borrowing. |
How To Calculate Auto Loan Payment
- 1
Subtract the down payment and trade-in
A 35,000 car with 5,000 down and no trade-in leaves 30,000 to finance before tax and fees.
- 2
Add tax and fees
Sales tax, registration and dealer fees are financed too. Add them to get the final amount financed.
- 3
Convert the rate to monthly
Divide the annual rate by 12. A 7.5% rate becomes 0.00625 a month.
- 4
Apply the payment formula
Compute (1+r)^-n, subtract from 1, and divide. For 30,000 at 0.00625 over 60 months the payment is 601.14.
- 5
Total it up
Multiply the payment by the term to get total paid, then subtract the amount financed to get total interest.
Examples
Example 1: 35,000 car, 5,000 down, 7.5% over 60 months
- Price
- 35,000
- Down payment
- 5,000
- Rate
- 7.5%
- Term
- 60 months
| Step | Calculation | Result |
|---|---|---|
| Amount financed | 35000 - 5000 | 30000 |
| Monthly rate | 0.075 / 12 | 0.00625 |
| Monthly payment | M = 30000 x 0.00625 / (1 - 1.00625^-60) | 601.14 |
| Total paid | 601.14 x 60 | 36068.31 |
| Total interest | 36068.31 - 30000 | 6068.31 |
Result: The payment is 601.14 a month; over the term you pay 36068.31 in total, of which 6068.31 is interest.
Example 2: The same loan stretched to 72 months
- Price
- 35,000
- Down payment
- 5,000
- Rate
- 7.5%
- Term
- 72 months
| Step | Calculation | Result |
|---|---|---|
| Amount financed | 35000 - 5000 | 30000 |
| Monthly rate | 0.075 / 12 | 0.00625 |
| Monthly payment | M = 30000 x 0.00625 / (1 - 1.00625^-72) | 518.67 |
| Total paid | 518.67 x 72 | 37344.24 |
| Total interest | 37344.24 - 30000 | 7344.24 |
Result: The payment drops to 518.67 but the total interest rises to 7344.24, over 1,200 more than the 60-month loan.
Calculator
Monthly payment
$601.14
- Amount financed
- $30,000.00
- Total paid
- $36,068.31
- Total interest
- $6,068.31
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the Auto Loan Payment calculator page.
Common Mistakes
Shopping by monthly payment
A payment quote hides the term and the rate. Convert it back to a total cost before agreeing to anything.
Stretching the term to afford more car
A longer term lowers the payment but raises the interest and keeps you upside down longer. The car loses value faster than the loan in the early years.
Financing with no down payment
With nothing down the loan starts larger than the car's value, so if you sell or crash early you owe more than it is worth.
Ignoring tax and fees
Sales tax, registration and dealer fees are financed and accrue interest. Adding them to the loan costs more than paying them up front.
Using the dealer's rate without shopping around
Dealer financing is convenient but often not cheapest. A bank or credit union pre-approval is a free check on the rate.
Forgetting insurance and maintenance
The loan payment is not the cost of the car. Insurance, fuel and maintenance sit outside it and are substantial.
Skipping gap insurance on a low down payment
If the car is written off, standard insurance pays its value, not your loan balance. On a low down payment the gap can be thousands.
FAQ
What is a good down payment for a car?
Twenty per cent is the traditional target, and enough to keep you from being upside down early. Even 10% meaningfully reduces the amount financed and the interest.
Should I choose a longer term to lower the payment?
Only if the lower payment is essential. A longer term raises total interest and keeps you in the loan longer. Compare total cost, not just the monthly figure.
Does a down payment lower the interest rate?
It lowers the amount financed, so it lowers the interest in money terms, and it may also earn a lower rate because the lender's risk is smaller.
Is dealer financing more expensive?
Not always, but it often is. Dealers can mark up the rate, so it is worth getting a bank or credit union quote to compare.
How much interest will I pay in total?
Multiply the payment by the number of months and subtract the amount financed. On 30,000 at 7.5% over 60 months that is 6068.31.
Does the formula include the trade-in?
The trade-in reduces the amount financed, exactly like a down payment. Subtract its value from the price before applying the formula.
References
- [1]Consumer Financial Protection Bureau, Auto loan calculator — https://www.consumerfinance.gov/consumer-tools/auto-loans/
- [2]Investopedia, Auto loan — https://www.investopedia.com/terms/a/auto-loan.asp
- [3]Federal Reserve, Consumer credit — https://www.federalreserve.gov/releases/g19/current/