How to calculate your car loan payment
Short answer
A car loan payment uses the same amortization formula as a mortgage: M = P[r(1+r)^n] / [(1+r)^n - 1], where P is the amount financed, r is your monthly interest rate, and n is the number of payments. On a $28,000 car with $3,000 down (so $25,000 financed) at 6.9% APR over 60 months, the payment comes to about $493.85 a month, with roughly $4,631 in total interest. Stretch the same loan to 72 months and the payment drops to about $425 but total interest climbs to about $5,602. These are estimates; your actual rate and payment depend on your lender and credit.
Car loan payment formula
M = P[r(1+r)^n] / [(1+r)^n - 1]
- •M is the monthly payment
- •P is the amount financed: vehicle price + sales tax - down payment - trade-in value
- •r is the monthly interest rate: APR / 12, written as a decimal
- •n is the number of monthly payments, the loan term in months
The three numbers that set your payment
A car loan is an amortizing loan, the same math a mortgage uses, just over a shorter term. Three inputs decide your monthly payment: how much you actually finance, your interest rate, and how many months you're paying it back. Get any one of those wrong in your head and your payment estimate will be off.
The amount financed is not the sticker price. It's the vehicle price, plus sales tax if your state taxes the purchase, minus your down payment and any trade-in value. Your APR gets converted to a monthly rate by dividing by 12, and the term is simply the number of monthly payments, typically 36 to 72 months, sometimes longer.
The amortization formula
Car loans use the identical formula lenders use for mortgages: M = P[r(1+r)^n] / [(1+r)^n - 1]. It looks intimidating, but each piece is simple, and it's the reason a loan calculator can spit out an exact payment instead of a rough guess.
Worked example: $28,000 car, $3,000 down, 6.9% APR, 60 months
Say you're buying a $28,000 car and putting $3,000 down, with no trade-in and no tax rolled in for now. That leaves P = $25,000 financed at 6.9% APR over a 60-month term.
The monthly rate is r = 0.069 / 12 = 0.00575. Raise (1 + 0.00575) to the 60th power and you get about 1.41060. Plug that into the formula: M = 25,000 x 0.00575 x 1.41060 / (1.41060 - 1) = 202.77 / 0.41060, which works out to about $493.85 a month.
Multiply that by 60 payments and you pay about $29,631 total over the life of the loan, meaning about $4,631 of that is interest on top of the $25,000 you borrowed. That interest figure, not just the monthly number, is the real cost of the loan.
Trade-in value and rolling sales tax into the loan
A trade-in works exactly like extra down payment: its value (what the dealer credits you, not what you think it's worth) comes off the price before the loan amount is calculated. If you still owe money on the car you're trading in, only the equity, trade value minus your remaining loan balance, reduces what you finance.
Sales tax is different. Most states tax the vehicle purchase, and many buyers roll that tax into the loan rather than paying it upfront. On the $28,000 car at a 6% rate, that's $1,680 in tax. Adding it to the $25,000 financed brings the loan to $26,680, which raises the same 60-month payment from $493.85 to about $527.04, roughly $33 more a month for the life of the loan. Rolling in tax is convenient, but it means financing (and paying interest on) money that never went toward the car itself.
Term length: lower payment now, more interest overall
The loan term is the lever that trades a smaller monthly payment for a bigger total cost, and it's easy to underestimate by how much. Take the same $25,000 loan at 6.9% APR and stretch it from 60 to 72 months.
At 72 months, the payment drops from $493.85 to about $425.03, a savings of roughly $69 a month. But total interest rises from about $4,631 to about $5,602, an extra $971 for the privilege of a smaller payment. The longer the term, the more months your balance sits accruing interest before it's paid down, so a lower payment on paper is rarely a lower total cost.
Being underwater: when you owe more than the car is worth
Cars lose value the moment they're driven off the lot, and fast in the first couple of years. Negative equity, being 'underwater,' means your remaining loan balance is higher than what the car would actually sell for. It's common with small or no down payments, long terms, and financed tax and fees, because all of those keep the loan balance high while the car's value keeps dropping.
The danger shows up if you total the car, sell it, or trade it in early: insurance typically pays out the car's market value, not your loan balance, leaving you to cover the gap out of pocket. Trading in an underwater car rolls that negative equity into the new loan, so you start the next car already owing more than it's worth, a cycle that gets harder to escape each time.
Common mistakes
Most car-loan regret traces back to a handful of avoidable habits. These are worth checking against before you sign.
- Shopping the payment instead of the total cost: a dealer can hit almost any monthly number you ask for by stretching the term, but that number alone hides how much interest you're actually agreeing to pay.
- Ignoring the term's effect on total interest: as shown above, 12 extra months on a $25,000 loan added about $971 in interest for only $69 a month in relief.
- Ignoring your trade-in's payoff balance: if you owe more on your trade-in than it's worth, that gap gets added to your new loan, not forgiven, so you finance the old car's debt along with the new one.
- Skipping the amount-financed math: buyers who focus only on the sticker price forget that tax, fees, and a rolled-in negative trade-in can push the real loan amount thousands above the price they negotiated.
- Not shopping the rate separately from the payment: a dealer-arranged loan and your own bank or credit union can quote very different APRs for the same amount and term, and even a point or two changes the total interest meaningfully.
Frequently Asked Questions
How much of my car payment goes to interest at first?+
More than you'd guess from balance divided by payment. In the worked example, the first month's interest on $25,000 at 6.9% APR is 0.00575 x 25,000, about $144. Out of a $493.85 payment, roughly $350 reduces the balance and the rest covers interest. As the balance falls each month, less of the payment goes to interest and more goes to principal, but the early months are the slowest for building equity.
Is a longer loan term ever the right call?+
Sometimes, if the lower payment genuinely fits your budget better and you understand the trade-off going in. The math is clear: a 72-month term on the $25,000 example costs about $971 more in total interest than 60 months, in exchange for about $69 a month in relief. A longer term also means more months of owing more than the car is worth, since depreciation runs faster than a stretched-out loan pays down principal.
Should I roll sales tax and fees into my loan?+
You can, and many buyers do for convenience, but it isn't free. Rolling $1,680 in tax into the $25,000 example loan raised the monthly payment by about $33 and means you're financing, and paying interest on, money that never went toward the car. If you can pay tax and fees in cash instead, you finance a smaller amount and pay less interest overall.
What does it mean to be underwater on a car loan, and how do I avoid it?+
Being underwater means you owe more on the loan than the car is currently worth, which happens fastest with small down payments, long terms, and financed taxes or fees. A larger down payment (even 10-20%) and a shorter term both keep your loan balance closer to the car's actual value as it depreciates. Before trading in a car you might still owe money on, check its current market value against your payoff balance so you know whether you're carrying negative equity into the next loan.
Sources & further reading
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