How to Calculate Auto Loan Payments (Formula & Guide)

Walking into a car dealership without knowing your numbers is a recipe for overpaying. Salespeople often focus on the “monthly payment” to hide the true cost of the car, extending loan terms to 72 or 84 months to make expensive vehicles seem affordable.

In this guide, we’ll break down the auto loan formula so you can calculate payments yourself and negotiate with confidence using our Free Auto Loan Calculator.

The Auto Loan Formula

The standard formula for calculating a monthly car loan payment is:

$Payment = \frac{P \times (r(1+r)^n)}{(1+r)^n - 1}$

Where:

• P = Principal (Loan Amount)
• r = Monthly Interest Rate (Annual Rate / 12)
• n = Loan Term in Months

Step-by-Step Example

Let’s calculate the payment for a $30,000 car with a 5% interest rate over 60 months.

1. Find the Monthly Rate (r): $5\% \div 12 = 0.05 \div 12 = 0.004167$

2. Calculate the Power Factor: $(1 + 0.004167)^{60} \approx 1.283$

3. Plug into Formula: $Payment = \frac{30,000 \times (0.004167 \times 1.283)}{1.283 - 1}$ $Payment = \frac{30,000 \times 0.005346}{0.283}$ $Payment \approx \mathbf{\$566.14}$

The Hidden Costs: Taxes & Fees

The sticker price isn’t what you borrow. You must add:

• Sales Tax: Often 6-10% of the price.
• Title & Registration: $100-$500 depending on the state.
• Doc Fees: Dealer documentation fees ($80-$500).

If you don’t pay these in cash upfront, they get added to your loan (Principal), meaning you pay interest on them for years.

Real Example: The True Cost

You buy a $30,000 car in California (7.5% sales tax):

Cost Item	Amount
Vehicle Price	$30,000
Sales Tax (7.5%)	$2,250
Registration	$350
Doc Fee	$495
Total Due	$33,095

If you finance the full $33,095 at 5% for 60 months:

• Monthly Payment: $624.95
• Total Paid: $37,497
• Interest Paid: $4,402

That “doc fee” alone cost you $98 in interest over 5 years.

The Impact of Loan Term

Extending your loan lowers your payment but skyrockets your interest.

$30,000 Loan at 5% Interest:

Term	Monthly Payment	Total Interest Paid	Total Cost
36 Months	$899	$2,360	$32,360
60 Months	$566	$3,968	$33,968
72 Months	$483	$4,774	$34,774
84 Months	$424	$5,607	$35,607

Going from a 5-year to a 7-year loan saves you $142/month but costs you $1,639 extra in interest.

The Underwater Risk

With longer loan terms, you owe more than the car is worth for years. A car depreciates about 20% the moment you drive it off the lot.

Example:

• Purchase Price: $30,000
• Amount Owed After 1 Year (84-month loan): $26,542
• Car’s Value After 1 Year: $21,000
• You’re Underwater By: $5,542

If you get in an accident and the car is totaled, insurance pays $21,000. You still owe the bank $5,542 (unless you have gap insurance).

How Interest Rates Affect Your Payment

Small rate differences make huge financial impacts over time.

$30,000 Loan for 60 Months:

Interest Rate	Monthly Payment	Total Interest	Difference from 3%
3%	$539	$2,340	Base
5%	$566	$3,968	+$1,628
7%	$594	$5,640	+$3,300
10%	$637	$8,220	+$5,880

A borrower with poor credit paying 10% instead of 3% loses $5,880 over the life of the loan.

Understanding APR vs. Interest Rate

Interest Rate: The base cost of borrowing money.

APR (Annual Percentage Rate): Interest rate + all fees (origination, doc fees, etc.) expressed as a yearly percentage.

If a dealer advertises “4.9% financing,” but charges $1,500 in fees, the APR might actually be 6.2%.

Federal law requires lenders to disclose APR on the Truth in Lending disclosure before you sign.

How Your Credit Score Affects Rates (2026 Data)

Credit Score Range	Average Auto Loan APR
781-850 (Super Prime)	5.64%
661-780 (Prime)	7.01%
601-660 (Subprime)	11.53%
501-600 (Deep Subprime)	14.08%
300-500 (Very Poor)	18%+ or denied

Example Impact: A super-prime borrower (800 score) financing $30,000 for 60 months pays $571/month. A subprime borrower (620 score) pays $662/month.

The difference: $5,460 more in interest for the lower credit score.

Down Payment Strategy

Putting money down reduces your loan amount, interest paid, and monthly burden.

$30,000 Car Purchase at 5% for 60 Months:

Down Payment	Loan Amount	Monthly Payment	Total Interest
$0	$30,000	$566	$3,968
$3,000	$27,000	$509	$3,571
$6,000	$24,000	$453	$3,174
$10,000	$20,000	$377	$2,645

A $6,000 down payment saves you $794 in interest over 5 years.

Why 20% Down is Ideal

If you put less than 20% down ($6,000 on a $30,000 car), you’re often:

1. Underwater immediately (owe more than it’s worth)
2. Subject to higher interest rates
3. Required to carry full insurance coverage

Trade-In Traps

Dealers love to roll negative equity into new loans.

Scenario: You owe $12,000 on your current car, but it’s only worth $9,000. You’re $3,000 underwater.

The dealer says, “No problem! We’ll give you $9,000 trade-in value and roll the $3,000 into your new loan.”

Result: You’re now financing:

• New Car: $30,000
• Negative Equity: $3,000
• Total Loan: $33,000 (plus taxes and fees)

This is how people end up owing $40,000 on a $30,000 car.

When to Use Auto Loans vs. Cash

Good Reasons to Finance

1. Low Interest Rates: If you can get 0-3% financing, it’s often smarter to finance and invest your cash at 7-10% returns.
2. Building Credit: A well-managed auto loan improves your credit score.
3. Manufacturer Incentives: “0% APR for 60 months” can be a genuine deal.

Bad Reasons to Finance

1. You Can’t Afford the Car: If you need 84 months to make the payment, you’re buying too much car.
2. High Interest Rates: If you’re paying 10%+, save up and buy used with cash.
3. Depreciating Asset: Cars lose value. Financing a rapidly depreciating asset at high interest is financially painful.

The 20/4/10 Rule

Financial advisors recommend:

• 20% down payment
• 4 years max loan term (48 months)
• 10% max of gross monthly income toward car payment

Example: If you earn $5,000/month gross, your car payment shouldn’t exceed $500.

Dealer Financing Tricks to Avoid

1. The “Four-Square” Worksheet

Dealers separate price, trade-in, down payment, and monthly payment into four boxes. They move numbers around to confuse you.

Defense: Negotiate the purchase price only. Discuss financing separately.

2. The Payment Packing

“Your payment is $450/month.”

Hidden in that: extended warranty ($50/month), gap insurance ($30/month), paint protection ($20/month).

Defense: Ask for the payment without any add-ons, then evaluate each separately.

3. The Rate Markup

The bank approves you for 5%, but the dealer tells you it’s 7% and pockets the difference.

Defense: Get pre-approved from your bank or credit union before shopping. Compare offers.

4. The “Dealer Incentive” Trick

“0% financing OR $3,000 cash back.”

Often, taking the cash back and financing through your bank at 4% is cheaper than 0% dealer financing.

Math: $30,000 car

• Option 1: 0% dealer financing = $30,000 paid
• Option 2: $27,000 (after $3k rebate) at 4% = $27,000 + $1,263 interest = $28,263

Option 2 saves you $1,737.

What This Means For You

Before You Shop

1. Check your credit score (free at AnnualCreditReport.com)
2. Get pre-approved by your bank or credit union
3. Calculate what payment you can afford (not what the dealer says you can afford)
4. Research the true cost (price + tax + fees)

At the Dealership

1. Negotiate the purchase price first
2. Don’t tell the dealer you’re paying cash until after price is set
3. Bring your pre-approval letter to compare against dealer financing
4. Read every line of the contract before signing

After Purchase

1. Make extra payments toward principal when possible
2. Consider refinancing if rates drop or your credit improves
3. Avoid rolling negative equity into your next loan

Use the Calculator

Skip the complex algebra. Use our Auto Loan Calculator to instantly see your payment, total interest, and how a trade-in affects your bottom line.

Frequently Asked Questions

Can I refinance my auto loan?

Yes. If interest rates drop or your credit improves, refinancing can lower your payment. However, most lenders won’t refinance if you’re underwater (owe more than the car’s value).

What’s the average interest rate in 2026?

For new cars: 5-7% for good credit. For used cars: 6-9%. For poor credit: 10-18% or higher.

Should I buy gap insurance?

If you put less than 20% down or have a loan longer than 60 months, gap insurance is worth considering. It costs $20-40/month and covers the difference if your car is totaled.

Can I pay off my auto loan early?

Most auto loans have no prepayment penalty. Check your contract. Paying off early saves you interest.

How is interest calculated on auto loans?

Simple interest, calculated daily on the remaining balance. Each payment goes partly to interest and partly to principal. Early in the loan, most of your payment is interest. Later, most goes to principal.