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How Are Car Loan Payments Calculated?

  • Auto Refinance
  • Renee Martin
  • 6 minutes

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You can avoid paying huge car loan payments if you know what goes into calculating them. Here’s a quick breakdown to keep you in the loop!

Buying a car is often an exhilarating experience – right from doing your research, discussing your choices with your peers, and doing test drives at the dealership. In the end, nothing beats the feeling of sitting behind the wheel of your dream car… until the time comes to start paying the auto loan! That’s when you start scratching your head and wondering, “How are these car loan payments calculated?”

It’s always best to do a bit of calculation beforehand so that you’re not caught unawares. Doing so will allow you time to adjust your finances and budget enough money to pay off the loan in time. Let’s take a look at how car payments are calculated.

What Is a Car Loan Payment?

When you want to purchase a car, it’s unlikely that you will have enough money to buy it outright. Most people take out an auto loan from a financial institution like a bank or dealership. The total amount loaned is called the principal, which is then repaid to the lender in monthly installments called car loan monthly payments. These payments include interest charges accrued over the course of the loan.

What Is Included in the Car Loan Payment?

Besides the principal and interest owed every month, the car loan payment also includes other charges and fees related to optional add-ons and insurance charges.

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How Can You Find Out Your Total Car Loan Amount?

The total loan amount is often not the same as the purchase price of the vehicle. There will be additional charges and rebates that you will have to add/subtract to reach the final loan amount. Follow these steps to find the exact amount:

Step 1: Settle On a Purchase Price for Your Car

This is the base amount over which the rest of the calculations need to be done. If you negotiate well, you may be able to get the car at a reduced rate than the asking price.

  • Let’s imagine that you negotiate the price for a new car and finalize it with the dealer at $20,000. 

Step 2: Calculate Sales Tax and Add It to the Purchase Price

Sales tax varies from state to state – so ensure you find out what it costs where you live.

  • If the sales tax is 7%, along with $200 charges as title fees. Then the tax amount is (20,000*0.07) + 200 = $1600. The total cost of the car becomes 20,000 + 1600 = $21,600.

Step 3: Deduct the Trade-in Value of Your Old Car (If Applicable)

If you are trading in your old car, you can deduct the current resale value from the total cost of the new car.

  • If the trade-in value is $3000, then the total purchase price becomes 21,600 – 3000 = $18,600.

Step 4: Add Dealership Fees, Document Fees, and Other Charges

Different dealers have service handling fees to help you process the loan documents.

  • Let’s suppose the dealership charges you an average of $500 in fees. Now the total cost becomes 18,600 + 500 = 19,100.

Step 5: Subtract Any Rebates or Discounts That You Qualify For

Certain manufacturers and dealerships offer rebates and discounts to encourage brand loyalty.

  • If your brand loyalty rebate is $1000, then the cost of the new car is now 19,100 – 1000 = $18,100.

Step 6: Subtract the Down Payment You Intend to Pay

The down payment is the amount of money you can afford to pay out of your pocket immediately. This will further reduce the total loan amount.

  • If your down payment is $3000, then the total loan amount is 18,100 – 3000 = $15,100.

Therefore, you have calculated the total loan amount you need to apply for as $15,100. To make things simpler, the Consumer Financial Protection Bureau has created a simple checklist that you can use to calculate your total loan amount easily.

What Is the Formula for Calculating Monthly Car Loan Payments?

How can you calculate your car loan monthly payments?

The above amount is paid off in the form of an amortized loan – which means that you pay scheduled, periodic, equal installments over the life of the loan. If you want to manually calculate your monthly car loan payments, use the formula:

A=P \frac {i(1+i)^n}{(1+i)^n-1}


  • P = the principal amount
  • i = the interest rate per month, which equals the annual interest rate divided by 12
  • n = the total number of months
  • A = monthly payment to be paid

In our above example, let’s assume the interest rate (i) is 7%, and you qualify for a loan term (n) of 4 years (48 months).

Using the above formula, the monthly car loan payment comes out to $361.59 per month.

How Can You Easily Calculate Car Loan Payments?

Of course, math may not always be your strong suit – and who has the time to sit and calculate anyway? Skip the formulas and easily find your car loan monthly payment by using an Online Auto Loan Calculator. By just inputting the necessary information, you can not only find out the due monthly amount but also compare the amounts with different rates and terms.

How Much Does the Average Car Loan Payment Cost?

Though it depends on various factors like your credit score, payments history, sales taxes in the state you live in, etc., Experian reports that the average monthly car loan payment is around $576 for new cars and $400 for used cars. According to their data, the total loan amounts for new vehicles have risen to an average of $35,000 – up by almost $2000 from last year.

How Can You Lower Your Car Loan Payments?

Whether you’re already paying car loan monthly amounts or considering taking a loan to buy a new car, consider these options to lower your monthly payments:

  • Ensure you have a good credit score and consistent payment history before applying for a loan
  • Always negotiate with the lender for a good APR
  • If you’re already paying high amounts, consider auto loan refinancing to a lower APR
  • You can also refinance your auto loan to a longer term and pay less every month
  • If you do not have good enough credit to lower your payment, you can refinance your loan with a co-signer
  • If you’re looking to purchase a vehicle, choosing a used car will help you get lower monthly payments

Is a 72-Month Term Too Long for a Car Loan?

The longer your loan term, the more you will likely pay as interest charges. In fact, for 72-month or 84-month loan terms, you may end up paying more than your car is worth. Most experts agree that a loan term below 60 months is the ideal length.

How can you calculate your car loan payments?


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