How do auto loans work?

Auto loans are one of the most common loan types in the U.S. In fact, more than 85% of newly purchased consumer cars involve an auto loan.

These loans apply to every type of vehicle.

  • Car
  • Pickup Truck
  • Van
  • Sport Utility (SUV)
  • Station wagon
  • Box truck
  • Minivan
  • Sports car
  • Hatchback
  • Sedan
  • Coupe
  • Convertible

An auto loan represents the amount of money owed by the borrower plus the total interest to be paid over the life of the loan. Auto loan payments are calculated by using the car price, the down payment from the buyer, the loan term, and the interest rate.

How do I calculate the interest payment on an auto loan?

The auto loan calculator above can show you the total amount of interest you will pay during the length of the loan. When you make payments on your auto loan, a portion goes toward the principal loan amount, and another part goes toward the interest owed.

The interest payment amount is based on the loan’s current balance and will change every month. The initial interest payments on the loan will be higher because the loan’s current balance is greater. Over time, the interest payments will get smaller as the loan is paid off. However, the portion of the loan that is paid toward the principal loan amount will remain the same.

You can use the auto loan calculator above or you can calculate it yourself with the following formula. Here’s the standard formula and the values you need to get started:

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To calculate your monthly interest payment, use this formula:

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Here is an example based on a $24,000 balance with a 6% interest rate:

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How will my credit score affect the interest rate on my auto loan?

The interest rates on auto loans are determined by the borrower’s credit score. Credit scores between 300-500 will have an average interest rate of 14.76% – 20.99%, while credit scores between 781-850 will have an average interest rate of 2.40% – 3.71%.

The age of the car will also affect the interest rate on the auto loan. New cars will have lower interest rates while used cars will have higher interest rates. Auto loans for used cars have a higher interest rate because it is harder to determine the resale value of a used car.

What is a good APR on an auto loan?

The APR, or interest rate, on your auto loan can have a major impact on the total cost of the car. The APR, along with the length of the loan (number of months), will be the two largest factors affecting your auto loan amount.

By looking at the APR of the loan, we can see that a higher APR will lead to higher interest payments over time. For example, the interest on a $24,000, 24-month loan at 5% is $1,270. However, the same loan ($24,000, 24-month loan) at 6% would have an interest cost of $1,529.

Therefore, finding the best APR will give you the lowest interest payment. However, getting the best APR can be tricky. APRs will vary based on your credit score, the loan type, the loan term, Federal Reserve interest rates, and your debt-to-income ratio.

The best way to determine what a good APR is for an auto loan is to look at industry averages.

Credit Score RangeAverage New Car Rate
300 – 500 (Deep Subprime)14.59%
501 – 600 (Subprime)11.03%
601 – 660 (Nonprime)6.61%
661 – 780 (Prime)3.48%
781 – 850 (Super Prime)2.34%

Following the chart, a “good” APR on your auto loan will be equal or less than the average rate associated with your credit score. You should always know your credit score and what a “good” APR is before entering an auto loan agreement.

Is a 72-month auto loan a good idea for me?

In general, car loans have variable interest rates that can increase in certain market conditions. Therefore, a shorter loan will mitigate the risk of rising interest payments on your auto loan. Further, as mentioned in the above example, the longer the loan term, the higher the total interest payment will be.

By looking at the life of the loan, we can see that longer loan terms cause higher interest payments over time. For instance, the interest on a $24,000, 24-month loan at 6% is $1,529. However, the same loan ($24,000 at 6%) paid over 48 months would have an interest cost of $3,055.

The greatest risk with a long-term auto loan is having your loan become “upside-down”. This can happen when the car depreciates at a rate where the value of the car is less than the balance on the loan. For reference, the average car’s value decreases ~20% to ~30% by the end of year one and ~15% to ~18% for the four years that follow.

Can I negotiate the APR on an auto loan?

Yes, and you should always try. In general, lenders do not typically offer the best APR right away. However, the amount you can negotiate will depend on your credit score and lender.