Car Loan Calculator

Understanding the True Cost of a Car Loan

For the average family, purchasing a vehicle is the single largest expense after housing. The ability to make smart financial decisions when buying new or used cars can significantly impact your monthly budget. Most financial experts advise keeping your auto loan payments between 10% and 15% of your monthly budget. Of course, this depends on each family’s unique situation, so being able to calculate the monthly payment and total cost of an auto loan is extremely important.

Example

Tony just got a new job in another city. His current assignment is close enough so that he can ride the train. However, Tony will need a car to commute to his new job.

He believes he can afford a monthly payment of $500. Tony finds the perfect vehicle on a car dealership’s website listed for $25,000. Before heading to the dealership to test-drive his new car, he wants to quickly calculate the estimated monthly payment to ensure it fits his budget. A loan calculator for a car is the perfect solution.

Two factors significantly impact the monthly payment on a car loan — the loan term and the interest rate.

• The Interest Rate is the amount of money that the lender charges you to borrow the money for your new car. It’s best to try and get the lowest interest rate possible. You may need to speak to more than one lender before deciding on a loan.
• The Loan Term is the amount of time you plan to borrow the money. Most auto loans range from 3 to 7 years (or 36 to 84 months). A longer loan will reduce the amount you will need to pay each month. However, because interest is added every month, the overall cost of the loan will be much higher than a shorter-term loan.

Understanding the Car Loan Payment Formula

The formula used to calculate a car loan payment can get quite complicated. The good news is that our loan payment calculator will do all of the work for you. However, it’s always a good idea to have a general understanding of how the calculation works.

The formula to calculate a car loan payment is:

$$PMT = \frac{(R × A)}{(1 - (1+R)^{-n})}$$

• PMT = Monthly Loan Payment
• A = Amount Borrowed
• R = Interest Rate
• N = Loan Term (number of months, years, etc.)

Note: Most auto loan lenders require payments to be made every month. If your loan is on a monthly payment schedule, use the monthly interest rate as the value for R. You can find the monthly interest rate by dividing your annual interest rate by 12. For example, if your bank charges a 5% yearly interest rate on a car loan, the monthly interest rate would be 0.416%.

How to Use the Car Loan Calculator

Our car loan calculator is easy to use. By providing just a few data points, you can quickly understand how an auto loan will affect your personal finances.

• Step 1: Fill in the loan amount. This is the amount that you will borrow to purchase the car. This amount will be the car sale price minus any down payment or trade-in value applied to the loan.
• Step 2: Fill in the loan term. The calculator allows you to enter the term in months or years.
• Step 3: Fill in the interest rate. The car payment calculator assumes that you will make monthly payments. However, you should enter the annual interest rate (or APR) in this box. The calculator will automatically convert this down to the monthly interest rate.
• Step 4: Click “Calculate” and review the results. When you click the Calculate button, the calculator will provide you with the monthly payment amount, the total cost of the loan (principal and interest), and the total interest paid over the life of the loan. From the results, you can also generate an amortization schedule by clicking on the "Create an Amortization Schedule" link.

Real Example

Let’s say you and your spouse just had a new baby. Unfortunately, your new car is too small for your larger family. You want to trade in your existing vehicle for a new minivan. The new van will cost $26,000. The car dealership will offer you $4,000 to trade in your old car. Your bank has offered you a 5-year loan at a 6% interest rate. Now you want to see the new monthly payment for the new vehicle.

To run this calculation, enter the following values into the auto loan calculator:

• Loan Amount: $22,000 ($26,000 minus the $4,000 trade in)
• Loan Term: 5 years (or 60 months)
• Interest Rate: 6%

Once you hit the Calculate button, you’ll see that your monthly payment will be $425.32 for five years. In addition, you’ll also find that the total cost of the loan, including interest, will be $25,519.30 (including a total of $3,519.30 in interest).

Key Benefits and Helpful Tips

Making wise decisions when purchasing a vehicle is vital to ensure you don’t take on more debt than you can afford. Here are some key benefits and helpful tips when using our loan payment calculator.

Key Benefits:

• No Memorizing Formulas - Calculating a monthly car payment can be complicated. This calculator ensures that you understand the actual cost of the auto loan without having to memorize complex formulas.
• Compare Multiple Loans - Sometimes, the terms of one loan are better than another. Car loan calculators help buyers compare loans quickly and decide which option is best for their family.
• See Full Cost of the Loan - While a monthly car payment calculator can show the monthly cost, most people forget to consider the total cost of the loan. While it’s essential to be able to afford the regular payment, you should also be aware of the total cost of the loan (including all interest). Our car loan calculator allows you to see the total cost quickly.

Helpful Tips:

• Think About Interest - While extending the length of your loan can lower your monthly payment significantly, it will also increase the total amount of interest you must pay. To minimize the total interest cost, you can negotiate a lower interest rate, shorten the term of your loan, or borrow less money.
• Down Payment Amount - Applying a larger down payment or trade-in to your loan can reduce your monthly payment. This can also decrease the total cost of the loan.
• Taxes and Fees - Most dealerships have additional costs that are charged to a vehicle. They include taxes, government registration, and other processing fees. These can increase your monthly payment, so it’s best to factor in about 5 to 10 percent of the cost of the vehicle to cover these. For example, if the sale price of the car is $10,000, you should assume that you will need to borrow at least $10,500 to $11,000.