Used car loan calculator

Why used car loans cost more per dollar borrowed

Lenders price used-car loans a point or more above new-car loans because older vehicles lose value less predictably and are more likely to need repairs. The car is the collateral, so a riskier asset means a higher rate. Rates also climb with the vehicle’s age and mileage, and many lenders will not finance cars past a certain age or mileage at all.

Offsetting that, a used car costs less up front and has already taken its steepest depreciation hit, so you are less likely to owe more than it is worth. A shorter term helps most: with a higher rate, every extra year adds noticeably more interest.

Where to look for a better rate

Get a pre-approval from a credit union or bank before visiting a dealer, then ask the dealer to beat it. Certified pre-owned programs from manufacturers sometimes carry lower promotional rates than ordinary used-car loans. Private-party purchases usually need a loan from your own bank or credit union, because dealers can only arrange financing on cars they sell.

$17,480 financed: payment by loan length

At 9.5% APR, financing $17,480 (the $18,000 price plus 6% sales tax and $400 in fees minus $2,000 down) costs $367.11 a month over 60 months and $285.69 over 84 months. The longer loan lowers the payment by $81.42 but adds $1,972 in interest. Going the other way, 36 months raises the payment to $559.94 and cuts total interest to $2,678.

How the interest rate changes a 5-year loan

On the same $17,480 over 5 years, each full percentage point of APR moves the payment by about $8.60 and total interest by about $516. 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.

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 $18,000 car at 9.5% over 5 years with different down payments.

Paying extra

Adding $100 a month to this loan would pay it off 15 months sooner and save $1,214 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 $18,000 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, $367.11 a month points to a gross income of roughly $44,100 a year to stay at 10%, before insurance, fuel and maintenance. This loan departs from the guideline because the down payment is 11% rather than 20% and the term of 60 months is longer than 48, 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 $18,000 car, you would likely owe more than the car is worth until about year 2. Gap insurance can cover the difference if the car is totaled while you are underwater.