How to Calculate a Car Loan Payment: Formula & Example

What a car loan payment is

Your car loan payment is the amount you pay the lender every month to pay off what you borrowed — principal and interest only. Principal is the money you borrowed; interest is the lender’s charge for lending it. A $35,000.00 car with $5,000.00 down and a $2,000.00 trade-in leaves a $28,000.00 loan; at 6.9% APR over 5 years that costs $553.11 a month — $33,186.81 in total, of which $5,186.81 is interest. This guide works through the five steps that turn a car price into that number, and shows you what the number leaves out.

Step 1: Work out the loan

The loan is not the car price. It is the price minus what you already paid: loan = price − down payment − trade-in. A $35,000.00 car with $5,000.00 down and a $2,000.00 trade-in leaves a loan of $35,000.00 − $5,000.00 − $2,000.00 = $28,000.00. Every dollar of down payment or trade-in comes straight off the loan: put $10,000.00 down and the payment falls to $454.34; trade in a car worth $5,000.00 and it falls to $493.85.

Step 2: Turn the APR into a monthly rate

The APR is a yearly rate, but you pay monthly — so divide it by 12. At 6.9% APR the monthly rate is 6.9% ÷ 12 = 0.575% a month, or 0.00575 as a decimal. That is the rate applied to your balance every month. At 9.9% APR the monthly rate is 0.825% and the payment rises to $593.54 — and the total interest rises to $7,612.43.

Step 3: Count the payments

Multiply the term in years by 12. A 5-year loan is 5 × 12 = 60 payments; a 3-year loan is 3 × 12 = 36 payments. The number of payments is the exponent in the formula, and it is why the term matters so much: every extra year adds 12 payments of interest. The first payment is November 2026 and the last is October 2031 — the first payment plus 60 − 1 months.

Step 4: Apply the formula

The payment formula is M = L·r(1+r)^n / ((1+r)^n − 1), where L is the loan, r is the monthly rate and n is the number of payments. With L = $28,000.00, r = 0.00575 and n = 60, the payment is $553.11 a month. The formula looks heavy, but it does one simple thing: it spreads the loan evenly so that every payment is the same and the balance reaches exactly zero on the last payment.

Step 5: Check the total interest

Multiply the payment by the number of payments, then subtract the loan. $553.11 × 60 = $33,186.81 paid in total; minus the $28,000.00 loan, that is $5,186.81 of interest. That is the number to compare when you shop for a rate: three points of APR, from 6.9% to 9.9%, lifts the total interest from $5,186.81 to $7,612.43. Totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

The worked example

$35,000.00 car, $5,000.00 down, $2,000.00 trade-in, 6.9% APR, 5 years. Loan: $35,000.00 − $5,000.00 − $2,000.00 = $28,000.00. Monthly rate: 6.9% ÷ 12 = 0.575%. Payments: 5 × 12 = 60. Payment: $28,000.00 × 0.00575 × (1.00575)^60 / ((1.00575)^60 − 1) = $553.11. Total paid: $553.11 × 60 = $33,186.81. Total interest: $33,186.81 − $28,000.00 = $5,186.81. Payoff: October 2031. Totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

Shorter terms cost less interest

Cut the term to 3 years and the payment rises to $863.28 — but the total interest falls to $3,078.05, and the payoff moves to October 2029. The payment goes up because the same loan is repaid in fewer payments; the interest falls because the balance shrinks faster. Stretch the term to 7 years and the payment falls to $421.23, but the total interest rises to $7,383.12. The shortest whole-year term whose monthly payment stays under $600 is 5 years (payment $553.11); at 4 years it is $669.20 — above $600.

Working backwards

The formula runs backwards too. A $500 monthly payment supports a $25,311.26 loan at 6.9% over 5 years — with $5,000.00 down and a $2,000.00 trade-in, that is a $32,311.26 car. A $550 monthly payment needs an APR of 6.66% (exact 6.6636%); at the displayed 6.66% the payment is $549.95, and at the exact 6.6636% it is $550.00. A $700 monthly payment supports a $42,435.77 car with the same down payment and trade-in, and a $400 payment needs a down payment of $12,750.99.

Extra payments

Paying extra toward the principal every month shortens the loan and cuts the interest. Adding $100.00 a month ends the loan in 50 months (December 2030), 10 months early, and saves $944.75 of interest. To pay the loan off in 3 years instead of 5 you need $310.17/mo extra — the smallest cent value that achieves 36 months; with the rounded extra the loan ends in 36 months with total interest $3,078.03 and interest saved $2,108.78. One cent less, $310.16/mo, gives 37 months — the bisection threshold is $310.165, and $310.16 still takes 37 months.

What the payment leaves out

The payment this guide calculates is principal and interest ONLY. It leaves out taxes, title, registration and dealer fees — costs that most car buyers pay on top of it, either up front or rolled into the loan. It also assumes a fixed rate and equal monthly payments for the whole term, and that the first payment month is the month after the loan starts. At 0% APR the payment is $466.67 — $28,000.00 ÷ 60, no interest at all.

How this connects

Run your own numbers with the car loan calculator; for the lease-or-buy choice, see the car lease vs buy calculator; and for paying a loan off early, see the loan payoff calculator.