Car price: This is the total amount you intend to finance, including the base cost of the vehicle, any upgrades, warranties, or other packages, plus taxes and fees.Down payment: This is the amount of cash you’ll use to buy the car—you’ll have to finance the difference between your down payment and the car price. If you’re trading in a car, put the value of that vehicle here.Loan term: This is how long it takes to pay off the loan. Along with the interest rate, it determines the total cost of the loan.Interest rate: The interest rate is used to calculate what you pay the lender to borrow the money. Along with the term, it determines the total loan cost.Credit score: If you’re not sure about the interest rate of your loan, you can use your credit score to estimate the rate. The estimates are based on the average interest rates for new car loans by credit score according to Experian data from the second quarter of 2020. Keep in mind that if you are getting a used car loan, your interest rate will be higher.
Based on the inputs above, the calculator determines the following:
Monthly payment: This is how much you owe your lender each month. The payment comprises principal and interest.Loan amount: This is the principal of the loan—the amount you finance.Total interest paid: This important number shows how much you’d pay to finance the vehicle. Generally, longer loan terms come with higher interest rates, meaning the loan is more expensive by the time you pay it off (though the monthly payment is typically lower).Total paid: This is how much you’d pay the lender over the life of the loan (total principal paid plus total interest paid) and indicates the true cost of your car.
How Is Interest Calculated on a Car Loan?
Although you make one monthly payment, the lender splits it into two parts—interest and principal. Your interest payment goes to the lender. It’s the price you pay for borrowing money. The principal amount goes toward paying down the cost of the car itself. Interest payments are calculated based on the remaining balance of the loan. Over time, as you pay down the balance, the interest payments get smaller. And since the monthly payment is unchanged, more of each payment goes toward paying down principal. This is a process known as amortization. Here’s how it works for a sample 12-month $10,000 loan with a 4.5% APR:
What Is a Good APR for a Car Loan?
A good APR for a car loan is around 3.24%, based on Q2 2020 information from credit bureau Experian. Most people aren’t paying that little, though. The average APR for a new car in June 2020 was 4.93%. For a used car, it was 9.25%. One of the biggest factors in determining your APR is your credit score. Here’s what average rates looked like on new car loans in Q2 2020, by credit score:
Your lender: Some lenders simply charge more than others.Your term length: The longer your term length, the higher your interest rate (generally).Used vs. new car: Loans used to buy new cars tend to carry lower interest rates than those on loans used to buy used cars.
How Can I Calculate My Car Payment?
Your monthly car payment is calculated by dividing the total paid over the life of the loan by the number of months in your loan. For example, if you finance $20,000 to purchase a car, and you pay $5,000 in interest (for a total loan cost of $25,000) over the course of a five-year loan, your monthly payment would be $416.67 ($25,000 divided by 60 months).
Where Can I Get a Car Loan?
There are many places you can get a car loan.
Buy-here-pay-here dealerships: These dealerships lend the money themselves. These loans come with high rates and are typically marketed toward customers with poorer credit. Dealerships: Not to be confused with those above, more reputable dealerships often work with partner lenders who lend the money. Credit unions: Most credit unions offer auto loans, although you need to meet membership criteria in order to join. Banks: Similarly, banks offer auto loans, and there are usually no membership requirements, although rates tend to be a bit higher than at credit unions. Online lenders: Some online lenders also offer auto loans.
Should I Use an Auto Loan Calculator?
Yes, it’s always a good idea to use an auto loan calculator before you start shopping. This lets you see how much you can reasonably afford, better prepares you to negotiate at a car lot or dealership, and helps you understand what’s the best auto loan for you. You can also play around with the numbers by changing the variables to see how they affect the monthly payment, total interest, and total paid. For example, try plugging in a shorter loan term to see if you can afford the payments and if you’d pay less overall.
What Are the Most Common Term Lengths?
According to data from Experian, here is the percentage of people opting for different term lengths in Q2 of 2020:
49–60 months: 15.7%61–72 months: 39.9%73–84 months: 35.1%85–96 months: 4.8%
Using a car loan calculator is just one step in making a smart financing decision. Once you get a sense of how the loan works, it’s smart to get preapproved for an auto loan before you go to the car lot. This gives you far more negotiating power than theoretical numbers spit out by a calculator.
