Car Loan Payment Formula
Where P = loan principal (car price minus down payment and trade-in), r = monthly interest rate, n = loan term in months.
Tips to Get the Best Auto Loan
- Check your credit score first — rates vary dramatically (3%–20%+) based on credit tier.
- Get pre-approved from a bank or credit union before visiting the dealership — dealer financing often carries a markup.
- Shorter loan terms save money — a 48-month loan at the same rate costs far less total interest than a 72-month loan.
- Put more down — a larger down payment reduces your loan amount and monthly payment.
- Avoid rolling negative equity — if you owe more than your trade-in is worth, adding that gap to the new loan increases your total cost.
- Watch for dealer add-ons — extended warranties, gap insurance, and accessories added to the loan increase your total cost significantly.
Loan Term Comparison
| Term | Monthly Payment | Total Interest | Best For |
|---|---|---|---|
| 24 months | Highest | Lowest | Minimal interest cost |
| 36 months | High | Low | Balance of cost & payment |
| 48 months | Moderate | Moderate | Most popular |
| 60 months | Lower | Higher | Lower monthly payments |
| 72 months | Low | Much higher | Maximum affordability |
| 84 months | Lowest | Very high | Use with caution |
Frequently Asked Questions
What is a good interest rate for a car loan?
In the US, excellent-credit borrowers (750+) can get rates as low as 3%–5% for new cars. Average-credit borrowers typically see 7%–12%. Rates above 15% are generally considered unfavorable — compare multiple lenders before accepting.
Should I finance through the dealer or my bank?
Always get pre-approved by your bank or credit union first. This gives you a competitive benchmark and negotiating power. Dealers earn commissions on financing, so their rates often include a markup over what you'd get directly.
What is gap insurance?
GAP (Guaranteed Asset Protection) insurance covers the difference between what you owe on the loan and what your car is worth if it's totaled or stolen. It's most useful in the early months when you may owe more than the car's value.
Can I pay off my car loan early?
Most auto loans allow early payoff without penalty, saving you the remaining interest. Check your loan agreement for any prepayment penalties before making extra payments.
What is a good down payment for a car?
Financial experts typically recommend 20% for a new car and 10% for a used car. A larger down payment reduces your loan amount, monthly payment, and total interest paid.