How To Calculate a Car Loan

Consumers can calculate their car loan by using loan details such as their funding amount, monthly payments, interest rate, and any other fees/charges included in their loan. Calculations may differ depending on the type of interest rate included with the auto loan. There are also auto loan calculator resources online that consumers may find helpful. 

A car loan, also called an auto loan, is a type of loan that helps people finance a vehicle purchase. If you are thinking of taking out a car loan of your own, you may be curious about how you can calculate a potential loan’s payment. Knowing how much you will be paying is extremely important, especially if you are trying to compare multiple offers. Below you will find a step-by-step process for calculating a car loan and more information about these loans in general. 

Steps for Calculating a Car Loan On Your Own

Once you have all the information you need, calculating your car loan can be pretty straightforward. According to USA Today, about 17% of Americans are paying at least $1,000 a month on their auto loans.1 

Here is what you need to do to figure out your monthly payment:

The First Step: Get Specifics From Your Lender

The first thing you will need to do is get specifics from your lender about loan terms. Ask about the interest rates on your car loan, car loan repayment periods, and the principal amount. They may ask for you to apply for pre-approval before providing this information. The convenient thing about pre-approval for a loan is that you don’t have to go through a hard credit inquiry (one that will impact your credit scores). Most car loans are fixed-rate loans, meaning the monthly payments will stay the same throughout repayment. 

Step Two: Know the Amortized Payment Formula 

The next step is to take the numbers that your potential lender or lenders have provided you and do some math. Because an auto loan is an amortized loan (a loan that factors varying amounts with each payment, as a person makes their monthly payments), you will need to use a specific formula:

A = P [ r x (1+r)n) / (1+r)n – 1) ]

A = the monthly payment.

P = the principal.

r = the interest rate per month, which equals the annual interest rate divided by 12.

n = the total number of months. 

Step Three: Plug in Your Numbers

Once you know the formula, all you have to do is plug in your specific loan numbers. Below is an example to help you get a better understanding of how to use the formula from above:

Let’s say that your principal amount is 20,000, your interest rate is 5%, and your repayment period is 3 years or 36 months. 

Here is how you would calculate the monthly payment with these numbers:  

  1. The first thing to do is to divide the interest rate by 100 to change it to a decimal and then by 12, which would give you 0.0042—the monthly interest rate for this formula. 
  2. Then plug in the numbers: 

A = 20,000 [ 0.42 x (1 +0.42)36 / (1+ 0.42)36 – 1) ]

A = 20,000 [ (0.00488401629) / (0.1628610213) ]

A = 599.77

As you can see, you will have a monthly car loan payment of approximately $599.77. And so, with three simple steps, you can calculate how much you will have to pay each month. 

Using an Auto Loan Calculator 

If you are not up for doing the math on your own, you can use a car loan calculator online! At CreditNinja, we have an easy-to-use calculator for amortized loans. Simply put in the correct information, hit enter, and let the auto loan payment calculator do the math for you! 

Don’t Forget to Factor in Any Fees

Because car loans involve the purchase of a vehicle, some fees will be associated with the sale. For example, you will have to pay sales tax; that amount will depend on where you live, and you can expect a range between 3% and 7%. 

The vehicle registration and title fees are other costs you should factor in when purchasing a car; expect to pay $100 to $400, depending on your state. 

Another thing to add to your expenses is car insurance. All 50 states require car insurance coverage, and the cost for that may increase when you switch vehicles. Talk to an insurance agent for specifics with your new vehicle beforehand so you know you can afford it. 

And finally, you may have to pay a documentation fee if you work with car dealers.

Factor in Your Down Payment or Any Trade in Value When Calculating Your Principal

You should never borrow more money from a loan than you need, so before requesting an auto loan amount, do not forget to add in any trade-in value or down payment for your new car purchase.

A down payment is an amount you can provide upfront. For cars, it usually is a few thousand dollars, and most experts say to put down at least 20% of the vehicle’s value. While trade-in value is monetary credit you may get if you sell to a car dealership and buy another vehicle from them. Depending on your car, condition, and mileage, you may be getting back hundreds or thousands of dollars; check out its Kelley Blue Book value for an estimate. 

If you have a down payment or trade-in value, make sure you factor that in with the principal amount you are thinking of taking out with your auto loan.

The Importance of Calculating Your Car Loan Payments

Before taking out an auto loan for a new or used car, it is essential to know how much you will be paying monthly. This can help you determine whether the loan is a good fit for your budget. Frequent late payments on a car loan can mean consequences like repossession of the car and a substantial negative impact on your credit score. Additionally, knowing your monthly payments on loan offers can help you compare multiple loans to find the most affordable. 

Other Things You Should Pay Attention to With a New Car Loan

The monthly payment is definitely important, but you should also pay attention to some of the factors that make up those monthly payments, along with a few other things. Here are some details you should look at with your car loan before making your decision:

  1. The Loan Term / Period — How long or short your loan will be will impact how much interest you pay over time and how much you have to pay each month. The longer the loan, the less you will have to pay monthly, but the more interest you will pay over time. While a shorter loan will mean paying more monthly, but less interest over the life of the loan. 
  2. The Interest Rate — Another important variable to consider before picking a loan is the interest rate of the loan offer. Your interest payments will likely be the most expensive cost when borrowing money. You can expect better rates from all lenders if you have a good credit score, while poor credit will mean the opposite. Either way, it will be helpful to compare your options. 
  3. The Financial Institution / Lender — The lender or financial institution you are thinking of working with will significantly impact your loan. For example, some lenders are more flexible than others, and if you have trouble making your car payment in the future, the more flexible lender may be more accommodating. And so, before you choose a lender to work with, check out past customer reviews and see if any consumer complaints have been filed with the Better Business Bureau. 

Alternative Options for a Car You Can Use To Make Your Vehicle Purchase

Although car loans are the obvious and most popular choice when financing a car, there are alternative options, some that could mean bypassing borrowing altogether:

Personal Loans

A personal loan is a loan option with steady monthly payments and are some of the most versatile loan options available. Along with the versatility, they are available for borrowers from several different credit backgrounds (with the right lender). They can come with a short or long-term repayment plan and can definitely be used to pay for a full or partial car purchase. 

Saving Up For a Car

You may want to consider saving overtime for a car, especially if you already have a working vehicle you can use. The more you have saved up, the less you have to borrow. And less debt is always better than adding new loans to your credit reports. If you have to borrow funds, a smaller loan will be easier to repay. 

Credit Cards for Partial Payments

It won’t be a good idea to pay for the total cost of your car on credit cards. Because their interest rates can be pretty high, it’s not a good idea to have a lot of credit card debt. Instead of purchasing your car with credit cards, you may be able to pay some fees involved with the car buying process. These costs include sales tax, vehicle fees, and document fees, etc.

Looking at Cheaper Car Options Which Don’t Require a Loan

Everyone knows that new cars depreciate significantly as soon as they are driven out from a car lot. As a buyer, you can use this to your advantage. Instead of considering a brand new car, look for a gently used one. You may find that you might not have to finance it. Or you can look at vehicles that are generally cheaper than the make and model you originally wanted.

Consider a Trade-in

If you are working with a car dealership, consider a trade-in. A trade-in involves swapping your old vehicle. The dealer will include that trade-in value towards your new car purchase. Depending on your old car, you could be looking at thousands of dollars towards the purchase, sometimes taking out the need for financing. 

Additional Insights on How Consumers Can Calculate Their Car Loan

Auto Loan Aspect DetailConsumer Benefit 
Loan Term LengthComparison of typical loan terms (e.g., 36, 48, 60, 72 months). Helps consumers understand how the length of a loan affects their monthly payment and total interest paid. 
Down Payment Impact Analysis of down payment percentages and their effect on loan amount. Demonstrates how a larger down payment can reduce the monthly payment and interest costs. 
Credit Score Tiers Breakdown of credit score ranges and their typical interest rates. Informs consumers about how their credit score can affect the interest rate and monthly payment they receive. 
Total Cost of OwnershipEstimation of maintenance, fuel, insurance, and other ownership costs over the loan period. Provides a comprehensive view of the total cost beyond just the loan payment.
Early Car Loan Payoff Benefits Scenarios showing the financial impact of early loan payoff. Highlights potential savings on interest rate charges and the effect on credit scores. 
Interest Calculation Methods Explanation of simple vs. compound interest in auto loans. Educates consumers on different interest calculation methods and which one may apply to their loan. 
Loan Fees and Penalties Common fees (e.g., origination, documentation) and penalties (e.g., late payment, prepayment). Alerts consumers to additional costs that can affect the total loan amount. 
Refinancing Options When and how to consider refinancing an auto loan. Offers strategies for reducing loan payment or interest rates during the loan term. 
Insurance Rate Factors How the car model, loan term, and borrower’s credit affect insurance rates. Assists consumers in estimating the insurance costs that accompany the car loan term. 
Disclaimer: The information provided in this chart is intended for educational purposes only and does not constitute financial advice. The details and scenarios presented are simplified and may not reflect all variables pertinent to individual circumstances. Consumers are encouraged to perform due diligence and consult with financial professionals before making decisions based on this chart. Loan terms, interest rates, and fees can vary significantly between lenders and are subject to change based on market conditions and creditworthiness. This chart does not guarantee the availability of any specific loan terms or conditions.

FAQ: Calculating a Car Loan

What factors should I consider when choosing between different interest rates offered by banks or credit unions for my car purchase?

When comparing interest rates from banks or credit unions, consider the APR, which includes all fees and costs, not just the base rate. Also, evaluate whether the rate is fixed or variable, as this will affect your payment stability over time.

How can the price of the car I choose affect the total interest I’ll pay over the life of an auto loan?

The higher the price of the car, the larger the loan amount may be, which can increase the total interest paid. Selecting a less expensive car or making a larger down payment can reduce the loan amount and, consequently, the interest charges.

Is it better to use an auto loan calculator provided by banks or credit unions or a third-party website?

Both can be accurate, but an auto loan calculator from banks or a credit union may offer more personalized rates and terms that are specific to their lending products.

How do auto loans with pre-computed interest differ from other auto loans when calculating payments?

Pre-computed interest loans calculate the total interest in advance and add it to the principal, which means early repayment won’t save you on interest. This differs from simple interest loans, where interest accrues on the outstanding balance.

Can the interest rates for auto loans vary based on the type of car I want to purchase?

Yes, interest rates can vary depending on whether the car is new or used, its make and model, and the perceived risk associated with the vehicle’s resale value.

How does my credit score affect the interest rates offered by banks or credit unions for an auto loan?

A higher credit score typically qualifies you for lower interest rates because it indicates to the lender that you’re a lower-risk borrower. Conversely, a lower credit score may result in higher interest rates.

When using an auto loan calculator, how should I input the price of the car if I’m planning to trade in my current vehicle?

Subtract the trade-in value of your current vehicle from the purchase price of the new car to determine the financed amount, and input this net amount into the car loan calculator.

What’s the difference in calculating an auto loan when choosing between dealership financing and a loan from a bank or credit union?

Dealership financing may include promotional offers or incentives that can affect the loan terms, while a bank or credit union may offer more standardized terms. Always calculate both options to see which is more cost-effective.

How frequently do interest rates change for auto loans, and how can I lock in the best rate?

Interest rates can fluctuate based on market conditions. To lock in a rate, get pre-approved for a loan, which typically holds the offered rate for a set period.

If the price of the car is below the loan amount I’m approved for, should I borrow the full amount or just what I need?

You should only borrow what you need for the car purchase to avoid paying unnecessary interest on unused funds. It’s financially prudent to keep loans to the minimum required.

How does sales tax affect the total cost of my car purchase and the calculation of my auto loan payments?

When you’re calculating the cost of your car purchase, it’s crucial to include sales tax, as this will impact the final amount you finance with your auto loan. Sales tax is determined by the state and possibly local jurisdiction where the car is purchased, and it’s applied to the price of the car before any incentives. Remember, when using an auto loan calculator, you’ll need to add the sales tax to the price of the car to get accurate loan payment estimates. Additionally, if you’re trading in a vehicle, the trade-in value is typically subtracted from the price of the car before sales tax is calculated, which can reduce the sales tax owed. Always account for sales tax when budgeting for your auto loan to avoid unexpected increases in your monthly payments.

A Word From CreditNinja on Calculating Auto Loans 

CreditNinja encourages everyone to be familiar with all credit products in their name, including auto loans, installment loans, etc. By familiarizing yourself with the various details of your loans, you can better prepare your budget to handle them. That way, you can be prepared to stay on top of your monthly payments and eventually pay off your balances! You can also find a helpful debt calculator, which can easily be used as a car loan calculator, on the CreditNinja website!

Looking for other tips on handling your finances, navigating secured and unsecured loans, and more, be sure to check out the CreditNinja dojo! 


  1. Dealers have cars and prices are stabilizing, but people still can’t buy a car. Here’s why | USA Today
  2. What New Car Fees Should You Pay | Edmunds
  3. Amortized Loan Amount Formula | Wall Street Mojo
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