How to calculate interest on a car loan
This guide shows how to calculate interest on a car loan, month by month and day by day, with an example and a calculator that shows the interest in every payment.
Amortization schedule
| Year | Principal | Interest | Balance |
|---|---|---|---|
| 1 | $4,560.47 | $1,075.93 | $15,439.53 |
| 2 | $4,841.73 | $794.67 | $10,597.80 |
| 3 | $5,140.35 | $496.05 | $5,457.45 |
| 4 | $5,457.45 | $179.01 | $0.00 |
Monthly method
Interest for a month equals the remaining balance times the APR divided by 12. On a $20,000 loan at 6%, month one’s interest is 20,000 × 0.005 = $100. The payment is $469.70, so $369.70 reduces the balance to $19,630.30, and month two’s interest is $98.15. Keep going to build the whole schedule, which the table above does.
Daily method
Some lenders accrue interest daily: balance × APR ÷ 365 × days since the last payment. A 31-day month accrues slightly more than a 28-day month, and a late payment accrues extra days. The total over the loan is close to the monthly method, with small differences in individual payments.
$20,000 financed: payment by loan length
At 6% APR, financing $20,000 costs $386.66 a month over 60 months and $292.17 over 84 months. The longer loan lowers the payment by $94.49 but adds $1,343 in interest. Going the other way, 36 months raises the payment to $608.44 and cuts total interest to $1,904.
| Term | Monthly payment | Total interest | Total paid |
|---|---|---|---|
| 3-year | $608.44 | $1,904 | $21,904 |
| 4-year | $469.70 | $2,546 | $22,546 |
| 5-year | $386.66 | $3,199 | $23,199 |
| 6-year | $331.46 | $3,865 | $23,865 |
| 7-year | $292.17 | $4,542 | $24,542 |
How the interest rate changes a 4-year loan
On the same $20,000 over 4 years, each full percentage point of APR moves the payment by about $9.22 and total interest by about $443. Rates depend on your credit score, the loan term and whether the car is new or used, so get a pre-approval from a bank or credit union before you walk into a dealership.
| APR | Monthly payment | Total interest | Difference vs 6% |
|---|---|---|---|
| 4% | $451.58 | $1,676 | −$870 |
| 5% | $460.59 | $2,108 | −$438 |
| 6% | $469.70 | $2,546 | +$0 |
| 7% | $478.92 | $2,988 | +$443 |
| 8% | $488.26 | $3,436 | +$891 |
What a bigger down payment does
A down payment reduces what you finance, which cuts both the payment and the interest, and it protects you from owing more than the car is worth early in the loan, when new cars depreciate fastest. Here is the same $20,000 car at 6% over 4 years with different down payments.
| Down payment | Amount financed | Monthly payment | Total interest |
|---|---|---|---|
| $0 | $20,000 | $469.70 | $2,546 |
| $2,000 (10%) | $18,000 | $422.73 | $2,291 |
| $4,000 (20%) | $16,000 | $375.76 | $2,036 |
Paying extra
Adding $100 a month to this loan would pay it off 9 months sooner and save $498 in interest, as long as your lender applies extra money to principal and charges no prepayment penalty. Ask before you start.
Can you afford a $20,000 car?
A common rule of thumb, the 20/4/10 guideline, suggests 20% down, a term of at most 4 years and total car costs under 10% of gross income. On payment alone, $469.70 a month points to a gross income of roughly $56,400 a year to stay at 10%, before insurance, fuel and maintenance. This loan departs from the guideline because the down payment is 0% rather than 20%, so the payment is lower than a stricter plan would give but the loan costs more overall.
Will you owe more than the car is worth?
New cars commonly lose around 20% of their value in the first year and roughly 15% a year after that, though this varies by model. Using that rough rule on a $20,000 car, the car stays worth more than the loan from the end of the first year. Gap insurance can cover the difference if the car is totaled while you are underwater.
| End of | Loan balance | Est. car value | Equity |
|---|---|---|---|
| Year 1 | $15,440 | $16,000 | +$560 |
| Year 2 | $10,598 | $13,600 | +$3,002 |
| Year 3 | $5,457 | $11,600 | +$6,143 |
| Year 4 | $0 | $9,800 | +$9,800 |
| Year 5 | $0 | $8,400 | +$8,400 |
Frequently asked questions
How much interest will I pay on a car loan?
Multiply your payment by the number of months and subtract the amount borrowed. The calculator shows this directly.
Does the interest portion change each month?
Yes. It is highest in month one and falls as the balance falls, while the principal portion rises.
How much is the monthly payment on a $20,000 car?
At 6% over 4 years, financing $20,000 costs about $469.70 a month with $2,546 in total interest. Change the inputs above to match your own quote.
Is a longer loan a good idea on $20,000?
A longer term lowers the payment but increases the total interest and keeps you owing money for longer, which raises the chance of owing more than the car is worth. Most lenders and consumer advocates suggest 60 months or less where the budget allows.
Related calculators
Estimates from standard loan formulas, not a loan offer or financial advice. Example rates are assumptions: use your own quote.