How to Calculate a Car Loan Payment

A car salesman working with a couple signing the loan paperwork to buy a new car.
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If you’re using financing to buy a new or used vehicle, you should already know that you’ll have to pay back that loan over several months or years. But just how much will you owe each month, and what costs are included in those payments?

When purchasing a car, it is nice to know how to calculate your car loan payment. Calculating total and monthly costs allows you to budget accordingly and figure out the total price of the car—not just the sticker price.

The math involved can be overwhelming if you do not use math often, but finding a good car loan calculator and having the right information handy can save you a lot of time.

What You Need to Know

Before you can calculate your exact payments, you'll need to collect some information about your car and finances. The Consumer Financial Protection Bureau (CFPB) has a handy worksheet you can use to gather this information, just fill in your details next to the example scenario.

First, figure out the overall value of the car and registration. This figure includes the sticker price of your car, along with any taxes, titling fees, warranties, and prior car loan amounts being rolled over into your new car loan. Once you've calculated this cost, you can subtract your down payment, along with any applicable rebates and the trade-in value of your previous vehicle.

Next, take a close look at the terms of the loan. To determine the car payment amount, you will need to know the length of the loan and the interest rate you will pay. The period of vehicle loans is generally stated in months, even if it lasts for years.

The CFPB has documented a steady rise in the length of car loans. Term lengths of six years or more made up just 26% of car loans issued in 2009. By 2017, these long-term loans made up 42% of car loans.

Do the Math

Loan payment calculators will do the math for you, but sometimes it's helpful to understand how these calculators arrive at these numbers. The CFPB has a worksheet on calculating loan payments if it helps to fill in your information next to a sample scenario.

To flesh out the basics from the worksheet, you can find your total loan payment by figuring out how much you'll pay in interest. Then, add the cost of interest to the principal amount of the loan. If you want to break that down by monthly payment cost, you can divide the final number by the months it will take to pay off the loan.

You can calculate your interest costs using the formula I = P X R X T, where:

  • "I" is the interest cost
  • "P" is principal, or the original amount borrowed
  • "R" is the rate of interest, expressed as a decimal
  • "T" is term, or length of the loan

For the equation to be accurate, you've got to make sure that your rate and term are both being measured by the same time intervals. For instance, if you're using an annualized interest rate, you must calculate your term in years.

Use a Car Loan Payment Calculator

Skip the hassle of math formulas and get straight to the answer you're looking for by plugging the necessary information into a loan calculator. A calculator makes it easy to input different combinations of numbers, allowing you to instantly compare the costs of loans.

Some loan calculators allow you to check how increasing your monthly payment affects how fast you can pay your loan off. These variables help you plan ways to reduce your debt. Technically, you can use car loan payment calculators on any of your loans. As long as you know your loan factors, the calculator will work.

Analyze the Information

Once you know what your car loan payment will be, use the information wisely. Shop around for a lower interest rate or reduce the length of your loan. It is never a good idea to obtain a car loan just because you like the low monthly payments. Lenders or car salespeople may offer to extend your loan to reduce your monthly payment, for example, but you will end up paying more overall. Extending a loan could even cause you to owe more than the vehicle is worth. If this is your only option, be sure to check into gap insurance.

Do Not Forget About Car Insurance

Some people forget about the cost of car insurance while budgeting for a new car. It is essential to work that cost into your monthly budget. All 50 states require drivers to have some kind of auto insurance, so this step isn't optional.

Insurance costs vary by the car you drive. If you're considering a new car, get a new insurance quote. This quote will help you more accurately budget for your new car.

The Bottom Line

Doing your research and making educated decisions will keep your finances in good health. Understanding exactly how much a new car is going to set you back before signing the papers is an example of how financial responsibility can prevent unwelcome surprises and keep your budget intact. Review your budget, crunch the numbers in a loan calculator, and feel good knowing you are making an educated purchase.

Article Sources

  1. Consumer Financial Protection Bureau. "Growth in Longer-Term Auto Loans," Page 4. Accessed March 30, 2020.

  2. General Services Administration. "Car Repairs and Auto Insurance." Accessed March 30, 2020.