How to calculate interest on a car loan

Westend61/GettyImages; Illustration by Hunter Newton/Bankrate

Auto loan interest is the cost of borrowing money to purchase a car. These charges are included in your monthly payment and can dramatically impact the amount you pay each month for your vehicle. The lender will look at your credit score, debt-to-income ratio and other factors to determine what interest rate it offers.

To calculate interest on your car loan, you must multiply the loan balance by your interest rate divided by the remaining months. Knowing your interest rate and how much goes toward your loan balance will help you effectively craft your budget.

How does interest work on a car loan?

Most lenders use simple interest for auto loans. Interest is calculated based on the amount you owe — the principal — each month. As you pay down your loan, you will spend less on interest and put more toward the principal.

Precomputed interest is less common and may be used on auto loans for borrowers with bad credit. The lender will calculate the total interest paid over the loan term. That total is added to the principal and split among your monthly payments, but not evenly.

If you don’t plan on paying off your loan early, there is no difference between simple and precomputed interest. If you do pay off your loan early, you will save more money with a simple interest auto loan.

How to calculate car loan interest payments

There are several ways to calculate your monthly auto loan interest payment. You can use an online loan payment calculator or work directly with a lender. As long as you know the principal, loan term and interest rate, you should be able to estimate your monthly payment — and the total interest you will pay.

Use an auto loan calculator

Free, online auto loan calculators allow you to skip the pencil and paper and instantly determine your interest payment. These calculators allow you to find the monthly payment with different interest rates and loan terms.

The Bankrate auto loan calculator will also provide a full amortization schedule so you can see the amount of interest you’re paying each month and the total interest paid over the life of the loan.

Work it out yourself

If you prefer to handle calculations by hand, you can find your car loan interest payments with a simple calculation.

Talk directly to a lender

You can also talk to a lender directly to compare potential rates. Working with a loan officer means getting a customized preview of your loan, including potential interest rates based on your down payment and how much you need to borrow. With a prequalified offer, you can precisely calculate your monthly payment.

Factors that determine car loan interest rates

To get an idea of what interest rates are available to you, you can get preapproval with several lenders. You should prequalify with at least three before heading to a car dealership. Your auto loan rate is determined by factors including:

• Credit score. Lenders weigh your credit score heavily when setting your rates. The lower your score, the higher your rate. According to data from Experian, the average rate for a new car buyer with excellent credit is 5.25 percent in the second quarter of 2024. People with bad credit paid significantly more. Those with credit scores between 501 and 600 had an average APR of 13.18 percent.
• Debt-to-income ratio. A lower DTI can mean a better rate because lenders will consider you less at risk of defaulting.
• Loan term. Generally, longer loan terms result in higher rates. It also means a higher amount paid over the life of the loan but can carry lower monthly payments.
• Down payment. Making a large down payment helps to offset the amount you borrow and can mean that you are less likely to become upside-down on your loan.
• Car age. Typically, the older the car, the higher the rate. If you want to buy a car over 10 years old, you may struggle to find auto financing at a reasonable interest rate.
• Work and education experience. Some lenders now look at your job history and education when determining your interest rate, which means you could qualify for a decent rate without the best credit score.

How to avoid paying too much interest

With the right strategy, you can pay less interest. Here are a few tips to help you save money.

Shop around for the best deal

Knowing what APR each lender will charge can help you find the car loan with the lowest overall cost. The interest rate listed on the main page is probably just the starting rate. You will likely need very good credit of 740 or higher and a stable income to get that low rate.

Dealerships make it easy to buy and finance in one place. But often, a dealership will not provide the best interest rate. Instead, get preapproved with a few direct lenders first and then negotiate like a cash buyer.

Save up before you buy

If you have some cash of your own, you can use that as a down payment on your vehicle, lowering your monthly payment and interest costs. A larger down payment can be more cost-effective than a long loan term because you will have a smaller principal and pay less interest over time.

Experts often recommend you put at least 20 percent down, but that’s not typically a hard requirement. Because both new and used car prices are currently high, the average down payment is about 15 percent for new cars and about 12.5 percent for used, according to Edmunds.

The bottom line

Calculating the interest on a car loan can be done with the help of a calculator, by hand or through a lender. Taking the time to do this math before choosing the loan to make your dream car a reality can help you make the right decision and minimize the risk of financial issues in the future.