- Interest is charged on the amount financed — the price minus your down payment and trade-in — not on the sticker price.
- A longer term always lowers the payment and always raises the total cost: on the default loan, 72 months costs $1,184 more than 60.
- Sales tax, destination charges, title and dealer fees are not in the payment shown — add them to the price first.
- Early payments are mostly interest, which is why a car can be worth less than its loan for the first year or two.
How the car loan calculator works
Set the vehicle price, what you are putting down and the rate you have been quoted, then pick a term. The amount financed is the price minus the down payment — a trade-in counts the same way — and the calculator amortizes that over the term you chose to produce a level monthly payment.
The result card shows three numbers, and the one a dealer rarely leads with is the middle one. A payment you can afford tells you nothing about whether the loan is a good one; total interest does, and it moves sharply with the term. The same car at the same rate can cost hundreds of dollars more or less depending only on how long you take to pay for it.
What is not in here: sales tax, destination and delivery charges, title and registration, dealer documentation fees and insurance. Those are real and often add several thousand dollars, so put them into the price before you read the payment if you want the figure your budget will actually feel. The schedule below shows where every payment goes.
The math
A car loan is a standard amortizing installment loan, so the payment comes from the same formula as a mortgage: P = L · r · (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), where L is the amount financed, r is the APR divided by 12 and n is the term in months. Total cost is that payment multiplied by n; total interest is total cost minus L.
Each month, interest is charged on the balance still outstanding and the rest of the payment reduces it. The early payments are mostly interest, which is why selling or totalling a car in its first two years so often leaves you owing more than it is worth: depreciation is fastest exactly when principal is being repaid slowest.
The model assumes a fixed APR, monthly compounding, equal payments and nothing rolled into the loan. It does not model tax, title, extended warranties or negative equity carried over from a trade-in — anything financed on top of the car has to be added to the price for the payment to come out right.
Worked example
The defaults describe a common purchase: a $35,000 vehicle with $5,000 down, financed at 7% over 60 months. That finances $30,000, costs $594 a month, and adds $5,642 of interest — $35,642 in total to drive away in a $35,000 car.
Stretch the same loan to 72 months and the payment drops to $511, which is the number a dealer will happily put in front of you. Interest rises to $6,826. You save $83 a month and pay $1,184 more for the privilege, while spending an extra year in the window where the loan is larger than the car is worth.
Key terms
- Amount financed
- The price minus your down payment and any trade-in credit. The loan is written on this figure, and it is what interest accrues on.
- APR
- The annual percentage rate — the yearly cost of the loan, fees included. Divide it by 12 for the monthly rate used in the payment formula.
- Term
- How many months you have to repay. Auto terms run from 36 to 84 months; a longer one lowers the payment and raises the total interest.
- Negative equity
- Owing more on the car than it is worth — being “underwater”. Common in the early years of a long loan, and it follows you into the next purchase if you trade in while it lasts.