* Loan expiry date is based on the loan term that you enter and should be used as an approximate date only.
Table of Contents
Car loans are the second-largest debt most households carry, after mortgages. Choices about term length, down payment, and where you get the loan often make a bigger long-term difference than the price of the car itself.
| Year | Principal | Interest | Balance |
|---|
How car loan payment is calculated
Car loans use the standard amortization formula — equal monthly payments that include both principal and interest:
M = P × [ r(1+r)n ] ÷ [ (1+r)n − 1 ]
- M — monthly payment
- P — loan principal (car price minus down payment minus trade-in)
- r — monthly interest rate (annual rate ÷ 12)
- n — number of monthly payments (loan term in months)
Worked example using the calculator's defaults ($20,000 car, $2,000 down, 8-year term, 4% APR):
- P = $20,000 − $2,000 = $18,000
- r = 0.04 ÷ 12 = 0.003333, n = 96 months
- (1.003333)96 ≈ 1.3763
- M = 18,000 × (0.003333 × 1.3763) ÷ (1.3763 − 1) ≈ $219 per month
Total paid: $21,063. Interest paid: $3,063. Note that an 8-year auto loan is on the long end — see "How long should my loan be" below.
How loan term length changes everything
Same $20,000 car, $2,000 down, 6% APR, at different loan terms:
| Term | Monthly payment | Total interest | Time underwater (typical) |
|---|---|---|---|
| 3 years (36 months) | $547 | $1,701 | About 8–12 months |
| 4 years (48 months) | $423 | $2,288 | About 12–18 months |
| 5 years (60 months) | $348 | $2,880 | About 18–24 months |
| 6 years (72 months) | $298 | $3,470 | About 30–36 months |
| 7 years (84 months) | $263 | $4,070 | About 36–48 months |
| 8 years (96 months) | $237 | $4,669 | 4–5 years |
Industry research has tracked a steady rise in average auto loan term length, now at 68 months (over 5.5 years) for new cars. Lenders push longer terms because they make the monthly payment "affordable" — but the borrower pays more interest AND spends more years owing more than the car is worth. The sweet spot for most buyers is 48–60 months.
Depreciation and the underwater problem
New cars typically lose value fast:
- ~20% in year 1 (immediately on driving off the lot, much of this)
- ~10% per year in years 2–5
- ~50% total loss by year 5 for the average vehicle
If your loan balance falls slower than your car's value, you're underwater — meaning if the car is totaled in an accident, your insurance payout (which pays the depreciated market value) won't cover the loan balance, and you'd still owe the difference. Gap insurance covers this gap; shorter loan terms shrink it; bigger down payments delay it.
Where to get a car loan: shopping order
The single biggest financial mistake when buying a car is letting the dealer arrange the financing without comparing. Recommended order:
- Get pre-approved from your bank or credit union first. Credit unions in particular often have the lowest car loan rates of any lender — sometimes 1–2% below dealer offers.
- Shop online lenders. Capital One Auto Finance, LendingTree, and others let you compare offers from multiple lenders with one application.
- Bring your best offer to the dealer. They'll often match or beat to keep the financing business. If they can't, use your pre-approved offer instead.
- Watch for "doc fees" and add-ons. Dealer documentation fees vary from $100 to over $700 by state. Extended warranties, GAP insurance, and "VIN etching" are often pure profit for the dealer — buy these elsewhere if needed.
Total cost of ownership beyond the loan payment
The loan payment is roughly half of what a car actually costs to own. Other monthly costs:
- Insurance: $100–$300/month depending on car, age, driving history, and state.
- Fuel: $100–$300/month for typical commuting.
- Maintenance: averages about $1,200/year for the first 5 years, rising after that.
- Registration and taxes: $50–$2,000/year depending on state and car value.
- Parking, tolls, depreciation: varies enormously by location and use.
Rule of thumb: total monthly car costs should be under 15–20% of take-home pay. The payment alone, under 10%. If you're tight against these limits, a cheaper car or longer keeping of an older paid-off car is usually the financially better move.
Sources & references
- Consumer Financial Protection Bureau — Auto Loans — consumer-focused guidance on shopping for auto financing.
- Experian State of the Automotive Finance Market — quarterly industry reports on average loan terms, rates, and amounts.
- Insurance Institute for Highway Safety — vehicle safety ratings useful for insurance cost estimates.
FAQs
The conventional answer is: as short as you can comfortably afford. Longer terms (72 or 84 months) lower monthly payments but greatly increase total interest paid, AND increase the time you spend underwater on the loan (owing more than the car is worth). 60 months is the typical practical maximum for most buyers. Anything past 60 months means you'll likely be upside-down for years — risky if you total the car or want to sell it.
Get pre-approved by your bank or credit union first, then see if the dealer can beat it. Dealers often mark up the actual lender rate to make money on the financing (called "dealer reserve"), so their advertised rate isn't always their best offer. Credit unions typically have the lowest car loan rates of all lenders. Pre-approval gives you a real comparison point and removes the financing as a negotiation lever during the deal.
It means you owe more on the loan than the car is worth. New cars typically depreciate 20% in the first year and 50% by year five. If your loan balance falls slower than the car's value, you're underwater — meaning if you total the car or want to sell, the loan payoff exceeds what you'd get for the car. Putting more down and choosing shorter loan terms both reduce the time spent underwater.
Lease if: you replace your car every 3 years, want lower monthly payments, and drive under 12,000 miles/year (lease overage fees are punishing). Buy if: you plan to keep the car 5+ years, drive a lot, want to modify or customize, or value owning a paid-off vehicle. Leasing is almost always more expensive over the long run because you're always paying for the most rapid depreciation years and never building equity.
Gap insurance covers the difference between what your car insurance pays out (the car's depreciated market value) and what you still owe on the loan, if the car is totaled. Worth having while you're underwater on the loan — for most new car loans, that's typically the first 1–2 years. After you have positive equity, you can usually cancel gap coverage. Don't buy it from the dealer (they mark up); buy from your auto insurer.