What Is a Car Loan?
A car loan (or auto loan) is money you borrow to buy a vehicle and pay back in equal monthly payments over a set number of months, usually 36 to 84. Each payment covers part of the amount you borrowed (the principal) plus interest. The car itself secures the loan: if you stop paying, the lender can repossess it. Because the lender holds that security, car loans usually cost less than unsecured borrowing such as credit cards.
Types of car loans
- New car loan: for a vehicle bought new from a dealer. These often have the lowest rates.
- Used car loan: for a pre-owned vehicle, from a dealer or a private seller. Rates are usually a little higher.
- Direct loan: you borrow from a bank, credit union or online lender, then take the approved amount to the seller.
- Dealer financing: the dealer arranges the loan with one of its lenders as part of the sale.
- Refinance loan: a new loan that pays off your current car loan, usually to get a lower rate or a different term.
- Lease buyout loan: pays the buyout price so you can keep a car you have been leasing.
How to Calculate a Car Loan
There are two steps: first work out how much you borrow, then the monthly payment on that amount.
Step 1: the loan amount
The price minus your trade-in is taxed. Then your down payment comes off, and anything you still owe on the trade-in is added:
Most states charge sales tax on the price after the trade-in, as above. A few tax the full price; check your state's rule.
Step 2: the monthly payment
Where:
- PMT: the monthly payment.
- PV: the loan amount from step 1.
- i: the monthly interest rate as a decimal (annual rate ÷ 12).
- n: the number of monthly payments.
Example
A $40,000 car with a $4,000 trade-in, 4% sales tax, $2,000 down and $1,000 still owed on the trade-in:
- Loan = ($40,000 − $4,000) × 1.04 − $2,000 + $1,000 = $36,440
- i = 7% ÷ 12 = 0.0058333, and n = 60, so (1 + i)60 = 1.41763
- PMT = $36,440 × (0.0058333 × 1.41763) ÷ (1.41763 − 1) = $721.56 a month
How to Use the Car Loan Calculator
"What will my monthly payment be on a $40,000 car if I put $2,000 down and trade in my old car, and how much interest will I pay?" This calculator answers that.
Let's enter the numbers for this example in each box. They are already filled in when the calculator opens, so you can follow along and then change any box to match your own deal.
- Vehicle Price: Enter 40,000, which is the price you agreed with the seller, before tax, trade-in and down payment. It must be greater than 0.
- Down Payment: Enter 2,000, which is the cash you pay up front. It lowers the amount you borrow. Enter 0 if you are not putting any money down.
- Trade-in Amount: Enter 4,000, which is what the dealer is paying for the car you trade in. It comes off the price before sales tax. Enter 0 if you have no trade-in.
- Owed on Trade: Enter 1,000, which is the loan balance still left on your trade-in. The dealer pays it off and adds it to your new loan. Enter 0 if your trade-in is paid off.
- Interest Rate: Enter 7, which is the yearly interest rate (APR) on the loan, in percent. It must be above 0 and below 100.
- Term: Enter 60, which is how many months you have to repay: 60 months is 5 years. It must be a whole number.
- Sales Tax: Enter 4, which is the sales tax rate in percent where you register the car. It is charged on the price after the trade-in. Enter 0 if your state has no sales tax on cars.
- Start Date: Leave it at today's date, which is the day the loan starts. The first payment is due one month later, and this date sets the dates in the payment schedule and the pay-off date.
Calculate and Reset
Click Calculate to see your results. If a box has a problem, such as a letter in a number box, a message pops up under that box instead. With the default numbers you get:
- Your Results: a short summary in words: a monthly payment of $721.56 on a $36,440 loan, how that loan amount was built up, and when the loan is paid off.
- Monthly Payment: the headline number, $721.56.
- Loan Amount, Over 60 Payments, Total Interest and Pay-off Date: you borrow $36,440, pay $43,293.34 in total, of which $6,853.34 is interest, and make your last payment 60 months after the start date.
- Chart: the principal and interest you pay each year, and the loan balance going down to zero.
- Payment schedule: every payment split into interest and principal, with the balance left after it. Switch between the yearly and monthly schedule, and use Download CSV to open it in a spreadsheet.
- Share Results: a link that opens this calculator with your numbers filled in. Copy it, or share it on Facebook or X.
Click Reset to put every box back to its default number (and the start date back to today) and show the default results again.