Car Loan Calculator
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How Car Loans Work
Car loans, also known as auto loans, are secured loans where the vehicle serves as collateral. Typical loan terms range from 2 to 7 years, with 5-6 years being most common. The loan amount is based on the purchase price plus taxes and fees, minus your down payment and trade-in value.
Interest rates for car loans vary based on your credit score, the vehicle age (new vs. used), loan term, and current market conditions. New cars typically get lower rates than used cars, and shorter terms usually have lower rates than longer terms.
Like other amortized loans, each payment includes both principal and interest. Early in the loan term, payments are mostly interest; later payments go more toward principal. Making extra payments toward principal can save you money on interest.
Tips for Car Financing
- Put down at least 20%: A substantial down payment reduces your monthly payment, interest costs, and prevents being underwater on the loan
- Keep terms under 5 years: Longer terms mean lower payments but much more interest paid. Cars depreciate quickly, so shorter terms are better
- Get pre-approved: Know your rate and terms before shopping to negotiate better prices and avoid dealer financing markups
- Consider total cost, not monthly payment: Don't let a dealer stretch your loan to hit a monthly payment target—focus on the total amount you'll pay
- Shop around for rates: Compare offers from banks, credit unions, and online lenders—credit unions often have the best rates
Frequently Asked Questions
What credit score do I need for a car loan?
Most lenders require a credit score of at least 600 for car loan approval, though some subprime lenders may approve scores as low as 500 with higher interest rates. Scores above 700 typically qualify for the best rates (4-6%), while scores below 600 may see rates of 10-20%. If your score is low, consider improving it before applying, or look for a co-signer to help secure better terms.
Should I finance through a dealer or bank?
Both have pros and cons. Dealer financing is convenient and they may offer special manufacturer incentives (0% APR, cash back), but their rates may include markup. Banks and credit unions typically offer more competitive rates (especially credit unions) and you'll know your terms before shopping, giving you negotiating power. Get pre-approved from a bank or credit union first, then compare with dealer offers to ensure you're getting the best deal.
How much should I put down on a car?
Aim for at least 20% down on a new car and 10% on a used car. This reduces your monthly payment, total interest paid, and helps prevent being "underwater" (owing more than the car is worth). Cars depreciate quickly—new cars lose 20-30% of their value in the first year—so a substantial down payment protects you from negative equity if you need to sell or trade in early.
Is a longer loan term always bad?
Longer terms (6-7 years) lower your monthly payment but come with significant downsides: you'll pay much more interest over the loan life, you'll likely be underwater for years (owing more than the car's value), and you risk still making payments on a car that needs expensive repairs. If you need a 6-7 year loan to afford a car, you should consider buying a less expensive vehicle instead.
Can I pay off my car loan early?
Most car loans allow early payoff without penalty, but always verify this in your loan agreement. Some lenders charge prepayment penalties, though this is becoming less common. Paying off early saves money on interest and frees up your monthly budget. Even making one extra payment per year toward principal can save hundreds or thousands in interest and shorten your loan by months.
Should I buy new or used?
Used cars offer better value since they've already depreciated. A 2-3 year old certified pre-owned vehicle can save you 30-40% compared to new, with most of the car's life remaining. However, new cars come with full warranties, the latest safety features, and lower interest rates. Consider your budget, planned ownership length, and tolerance for potential repairs when deciding. Avoid very old cars (10+ years) unless paying cash—financing costs can exceed the vehicle's value.