A car loan is a fixed-rate amortizing loan: you finance the price minus your down payment, then repay it in equal monthly instalments. Each payment covers the month's interest first, and the rest chips away at the balance — so early payments are mostly interest and later ones mostly principal. The payment formula is M = P·r(1+r)ⁿ/((1+r)ⁿ−1). The two levers that matter most are the down payment (less borrowed) and the term (a longer term trades a smaller payment for more total interest).
Reviewed: June 20, 2026 · Author: Naveen P N, Founder — AI Calculator · Verified against: the standard loan amortization formula. Not financial advice.
The car loan equations
The principal P is only the borrowed portion — your down payment and trade-in never accrue interest. The monthly rate r is the APR split into twelve, and n is the number of monthly payments. The amortization factor r(1+r)ⁿ/((1+r)ⁿ−1) converts the principal into the level payment that exactly clears the balance over n months. Multiply by n for the total paid and subtract P for the interest. If APR is 0% (a promotional deal), the payment is simply P ÷ n.
Worked example — a 30,000 car
Scenario: 30,000 vehicle, 5,000 down, 6% APR, 5-year term.
The monthly payment is about 483.32. Over 60 payments you pay 28,999 on the loan, so the interest is about 3,999 on top of the 25,000 borrowed; the car's all-in cost (with the down payment) is about 33,999 before taxes and fees. Drop to a 3-year term and the payment rises to about 760.55 but interest falls to roughly 2,380; stretch to 7 years and the payment eases to 365.21 while interest climbs past 5,600. That trade-off — payment size against total interest — is the central decision in financing a car.
Frequently Asked Questions
M = P·r(1+r)ⁿ/((1+r)ⁿ−1) on P = price − down. 25,000 at 6% over 5 yr ≈ 483.32/mo.
Yes — less is financed, so both the payment and total interest fall, and the APR may improve.
It lowers the monthly payment but raises total interest. 25,000 at 6%: 760/mo (3 yr) vs 483/mo (5 yr).
APR includes certain fees, so it's the fuller cost. Enter APR for a closer estimate.
No — only the loan payment. Add tax, registration, insurance and fees separately.