The Best Car Loan Calculator
Calculate your monthly payment or the vehicle price you can afford
Nolan Tronowicz
Business analyst, writer, and car enthusiastThe Basics of How Car Loans Work
A car loan is a personal loan that allows you to purchase a vehicle. When you take out a car loan, you agree to pay back the amount you borrowed (the principal) plus interest over a set period of time. The interest rate on a car loan is the cost of borrowing money and is expressed as a percentage. The interest rate you receive on a car loan depends on your credit score, the lender, the loan term, and the vehicle you are purchasing.
- The Principal is the amount of money you've borrowed. It includes the vehicle price plus other items such as sales tax and dealer fees.
- Interest Rate (APR) is how much it will cost you to borrow the money. It is always a percentage that is a yearly rate. A 10% APR means you will pay 10% of the amount you borrowed each year.
- Term Length is the amount of time you need to pay off the loan. It is typically in months. This is because car loans are a type of installment loan, which means you pay a fixed amount each month (can also be weekly, bi-weekly or semi-monthly) until the loan is paid off.
If you have a high interest rate, you want to get a lower term length. If you get a good interest rate, you can get a longer term to lower your payments. - Trade-in vehicles: Trading in your vehicle makes it easier to switch from your old car to a new one. Car dealerships handle vehicle registration, inspections, and tax payments for you. The trade-in value is the credit a dealership offers for your old car, which is then deducted (and tax-credited) from the price of the new one. So, if you trade in a car worth $10,000 and buy another for the $30,000 — you would only pay sales tax on the $20,000 difference.
However, there’s a trade-off. Dealerships often offer you $4,000 to $8,000+ less than the actual worth of your vehicle. This discrepancy exists because dealers need to make a profit when selling your old car. If you choose to sell your vehicle privately, you may receive a higher amount, but this approach can be more cumbersome and time-consuming. - Down Payment A down payment is the amount of money you pay upfront when you buy a car. The more money you put down, the less you need to borrow, and the lower your monthly payment will be. A down payment of 20% is recommended, but you can put down as little as 0%.
- Existing Loan If you have an existing balance on your trade-in vehicle, You can add this balance to the new loan. This is essentially refinancing your existing loan. If you get a good interest rate on your new loan, it might be okay to add it to the new loan. But bringing in negative equity from a previous loan is not a good idea. It can lead to a cycle of negative equity that can be hard to get out of. It may also sometimes force you to purchase GAP insurance (see below), which can cost $300-$1000 for the time you require GAP.
What is Considered a Good Deal?
If you're looking for a simple answer, in 2025, the best interest rate you can expect is 5% to 7.5% for New car loan, and 7% - 9.5% for a Used car loan.
Of course, it's never that simple. Your credit score, the car you're buying, and the term
length are all factors that can affect the amount of extra interest you'll pay. A practical
guideline for car loans is to keep your payment to around 10% - 15% of your gross monthly income. If you get a excellent interest rate (0% - 4% is an excellent rate), you can justify a higher payment, but careful getting long terms (60 months or more) to make the payment fit your budget.
Here's a table for the expected interest rates based on credit score (Fall 2024)
Source: Experian Information Solutions.
Quick Car Loan Tips
- Follow the "20/4/10 rule":
- Put at least 20% down
- Finance for 4 years or less
- Keep your total monthly vehicle expenses (including insurance) under 15% of your gross income
- Shop around for the best deal: Don’t settle for the first financing offer you receive. Dealerships, especially when it comes to used cars, may tack on an extra percent or two after your approval. To secure the best deal, compare rates from multiple lenders and do your homework by researching and applying for financing beforehand to know the rates you can expect.
- Get the shortest loan term possible: While a longer loan term will mean lower monthly payments, you’ll pay more in interest over the life of the loan. Banks and dealers will offer you low monthly payments, zero down and long terms. But this is exactly what you do not want. This makes the bank the winner, not you.
- Put down a larger down payment: As a general rule, you should try to put 20% down on a car loan. It will reduce your interest costs, and will help you avoid paying for Gap Insurance (See below), saving $300-$1000.
- Don’t forget about taxes and fees: When calculating how much you can afford, don’t forget to factor in taxes, fees, and other costs associated with buying a car.
- Know your credit score: Your credit score will have a big impact on the interest rate you’re offered. The higher your score, the lower your rate.
- Ask for a co-signer: Have a partner, family or friend co-sign with good credit can help you qualify for a lower interest rate.
Vehicle Depreciation & Gap Insurance
View our article on GAP Insurance here
When you buy a car, it starts to lose value immediately. This is called depreciation. In the first year, a new car can lose 10%-20% of its value, and it can lose up to 50% or more of its value in the first five years.
Now let's talk about GAP (Guaranteed Auto Protection) Insurance. If you've ever heard the phrase "negative equity" or "upside down" on a loan, it means the outstanding balance left on the loan is greater than the value of the car. This can happen in several ways:
- Zero down payment — When a buyer doesn't make any initial payment and finances the entire car price.
- Long loan term — When the loan term is extended, resulting in slower equity build-up.
- Existing loan gets rolled into the new loan — If you have not finished paying off your current car loan, and then you trade in your car for a new one, the remaining balance of the old loan gets added to the new loan.
- High sales tax & fees — When additional costs like sales tax, registration fees, freight & delivery (destination) fees and dealer fees are added to the loan amount — immediately place you in a negative equity situation
If your car is totaled in an accident or stolen, your insurance will only pay the current value of the car — NOT the remaining balance on your loan. This is where Gap Insurance comes in. It covers the difference between the car’s value, and the amount you owe on the loan. If you have high negative equity (or are accident prone), it’s a good idea to get Gap Insurance. It’s relatively inexpensive and can save you thousands of dollars. Insurers will typically cancel your gap insurance once you are no longer upside down on your loan (usually after 2-3 years).
Below is a graph based on the information you provided above. It shows the remaining balance of the loan vs. the value of the vehicle after each month (assumes 13% depreciation per year).
Vehicle Value vs Remaining Principal Due
This graph shows the remaining balance of the loan vs. the value of the vehicle after each month.
Remember, this graph is not particular to your vehicle. It assumes a 13% depreciation rate per year. Your vehicles depreciation rate may vary.
Can I pay my loan off whenever I want?
Yes! By law (US and Canada), lenders must allow you to pay off your loan whenever you'd like. In fact, it's a good idea if you can afford it. The sooner you pay off your loan, the less you'll pay in interest. However, some loans have prepayment penalties, so be sure to check with your lender before making extra payments. If you can't afford to pay off the loan early, you can still save money by making bi-weekly payments instead of monthly payments. This will result in one extra payment each year, which can help you pay less interest over the period of the loan.
- How much are prepayment fees? Most well-established lenders typically don’t charge prepayment penalties. This is likely the case if you secure financing through car manufacturers such as Toyota, Tesla, Ford, and others, as well as major banks. However, smaller credit unions or subprime lenders might levy a fee for early loan repayment. This fee often equates to 1-2% of the outstanding loan balance. For instance, an early repayment of a $20,000 loan could cost you between $200 and $400.
Thanks for coming and checking out the car loan calculator. I hope you found it helpful. If you have any questions or suggestions, please feel free to reach out to me at nolan.tronowicz@sparewires.com