Use this Car Loan Cost Calculator to instantly determine your monthly payment, the total amount you will repay over the life of the loan, and the total interest cost. Plan your car purchase with precision.
Calculate Cost of Car Loan
Your Estimated Monthly Payment is:
$0.00Calculation Steps:
Car Loan Cost Formula
The cost of a car loan, specifically the monthly payment, is calculated using the standard amortization formula (Ordinary Annuity formula). This formula allows us to determine the fixed monthly payment needed to pay off the principal and interest over a set term.
M = P [ i(1 + i)ⁿ / ((1 + i)ⁿ - 1) ]
Formula Source: CFPB Auto Loan Guidance | Investopedia Amortization
Variables Explained
Here is what each variable in the calculator represents:
- Loan Principal Amount (P): The total amount of money you are borrowing. This is the purchase price minus any down payment or trade-in value.
- Annual Interest Rate (APR / r): The yearly cost of borrowing, expressed as a percentage. This is used to derive the monthly interest rate (i).
- Loan Term in Years (N): The length of time over which the loan will be repaid, expressed in years. This is converted to the total number of payments (n).
- Monthly Payment (M): The fixed amount paid each month to the lender.
- Total Interest Paid: The total cost of the loan beyond the principal.
What is the True Cost of a Car Loan?
The true cost of a car loan is not just the sticker price of the vehicle; it is the total of the principal amount borrowed plus all the interest you pay over the loan term. Understanding this difference is crucial for effective budgeting and financial planning. A loan with a lower interest rate or a shorter term will significantly reduce the total interest paid, thus lowering the overall cost.
Furthermore, a longer loan term (e.g., 72 or 84 months) results in a lower monthly payment, making the vehicle seem more affordable. However, you pay significantly more interest over time and carry the risk of the car depreciating faster than you pay down the loan (going “underwater”). Always aim for the shortest term you can afford comfortably.
How to Calculate Car Loan Cost (Example)
Let’s use an example: Borrowing $25,000 at a 6% APR for a 5-year term.
- Determine Variables: Principal (P) = $25,000. Annual Rate (r) = 0.06. Term (N) = 5 years.
- Calculate Monthly Rate (i): $i = 0.06 / 12 = 0.005$.
- Calculate Total Payments (n): $n = 5 \times 12 = 60$ months.
- Apply Amortization Formula: Plug $P$, $i$, and $n$ into the formula to solve for the Monthly Payment ($M$).
- Find Total Payment: Multiply $M \times n$ (Total Payments).
- Find Total Interest: Subtract the Principal ($25,000) from the Total Payment.
Frequently Asked Questions (FAQ)
How does my credit score affect my car loan cost?
A higher credit score typically qualifies you for a lower Annual Percentage Rate (APR), which directly reduces the total interest you pay, making the loan significantly less expensive over time.
Should I choose a 4-year or a 6-year loan?
A 4-year loan will have a higher monthly payment but will save you thousands of dollars in total interest. A 6-year loan lowers the monthly payment but increases the overall cost of borrowing. Financial advisors often recommend the shortest term you can reasonably afford.
What is the difference between APR and Interest Rate?
The interest rate is the cost of borrowing the principal. The APR (Annual Percentage Rate) includes the interest rate plus any additional fees or costs associated with securing the loan, providing a more accurate measure of the total annual cost.
Does a larger down payment reduce the total loan cost?
Yes. A larger down payment means you borrow less money (a smaller principal), which reduces the amount on which interest is charged, thereby significantly lowering both your monthly payment and your total interest expense.
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