Congratulations! If you're reading this, it's likely that you're looking for a new car. Whether you're looking for a practical vehicle for a new driver or something to show off at work, you've come to the right place.
No matter the kind of car, you need to make sure that you're getting the best car loan. And, that means finding the best interest rate for your car loan.
Lucky for you, we can help you with an auto loan calculator. We've brought all of the information about car loans and interest rates together right here. With this guide to auto loans, you'll be set to make the right choice when it comes to your future car loan.
Just keep reading.
What Is the Formula to Calculate a Car Loan?
The auto loan calculator formula that determines your car loan includes many factors:
- The price of the car
- The downpayment that you're making on the vehicle
- The length of the car loan
- The interest rate of the loan
It's also important to note that the interest rate of your loan is going to depend highly on your credit score and the kind of car you're buying. Used cars tend to have much higher interest rates than new cars. And, it doesn't matter whether you get it off the lot or from a car auction.
There is no absolute car loan payment calculator to determining the exact interest rate and monthly payment that you're going to get for your auto loan. But, it is important to get a general idea about the kind of payment that you can expect with your credit score and other factors.
5 Factors That Affect How Much Interest You Pay on a Car Loan
The amount of interest that a lender charges you are going to depend on several factors:
- The amount of the loan that you're taking out
- The interest rate on your loan
- The term of your loan
- The repayment schedule for the loan
- The monthly payment for the loan
Ideally, you should be paying the least amount of interest that you can. This will lower your monthly payments and reduce the cost that you're paying outside of your actual loan amount.
To determine the amount of money that you may need to take out, you should look at car prices online. These can help you determine how much your vehicle may cost.
Let's talk about each of these factors and consider how they affect your interest rate payments. And, we'll look at how you can use each factor to your advantage.
1. Loan Amount
The amount of money that you borrow is going to affect your interest payments. Since your lender multiples your interest rate by your principal loan amount, a bigger loan leads to larger interest rates.
Basically, the more money you borrow, the more interest you pay.
It's important to think about this in terms of risk. If the lender is giving you a larger loan, they're assuming more risk. So, they should get a larger return on the money that they're loaning you.
Thus, larger loan amounts lead to higher interest payments and higher returns for lenders.
This is a great reason to avoid larger loans if you can. Don't borrow more money than you need to or you'll end up paying unnecessary interest on that loan.
Before meeting with any lenders, you should understand what you can afford. Then, you can compare the offers from different loan amounts.
2. Interest Rate
Just like the previous criteria, the interest rate affects the amount of interest because of the equation that lenders use to calculate your payments. In this equation, they multiply the interest rate and the principal loan amount.
Thus, just like the previous criteria, a higher interest rate leads to higher interest payments.
So, the goal is to get as low of an interest rate as possible. This is where your credit score comes in.
The higher your credit score is, the better your interest rate will be. So, you should work on bettering your credit score, especially when you know that you're planning on taking out a loan soon.
Here are few tips to improve your credit score:
- Pay every single payment on time
- Try to pay your debts in full
- Catch up with any debt that you have lingering
Leading up to a loan, you should check your credit score often. Even if it's not the best, you should know what number you're working with so that you know what kind of interest rates credit lenders may be looking at.
While you're searching for the right loan, it's also important to take the kind of loan into account. It could feature a fixed interest rate or a variable interest rate.
A fixed interest rate stays the same across the term of your loan, so your monthly payments are predictable in the long term. A variable interest rate changes as the market changes, so you may experience both high and low-interest rates during your loan term.
All in all, we encourage you to prepare ahead of time. You should do your research when it comes to your loan and your credit score.
3. Loan Term
The loan term is the amount of time that you and your lender agree for you to pay off your loan. It could be five years, thirty years, or some other amount of time. When it comes to auto loans, five to ten years is typical.
Although, it's important to think about these payments in terms of months. This is because you'll be making your payments towards the loan on a monthly basis. The longer it takes you to pay off the loan, the more interest you'll be paying.
You'll have more interest because you're borrowing the money for a longer amount of time. So, the lender has to make money off of you borrowing theirs.
But, if you have a shorter loan term, you'll also have higher monthly payments even though you're paying less interest over time. This is because you'd have to pay off the principal faster with a shorter loan term.
However, if you can afford higher monthly payments, it will be worth it, in the long run, to go with a shorter term. You'll save more money over time.
With this in mind, you should make sure you understand what kind of monthly payment you can afford each month. Calculate this before you meet with a lender so that you understand what your limitations are. And, you should be sure to make some wiggle room in your budget just in case an emergency were to happen during the term of the loan.
4. Repayment Schedule
Your repayment schedule for your auto loan will likely be monthly. Although, some lenders may offer weekly or biweekly payments. You and your lender will reach an agreement while you're choosing the loan that's right for you.
If you're able to make payments more than once a month, you may be able to save some money. This is because you're paying off the principal faster. Even if the loan term is the same amount, you're making the principal appear a little bit smaller every time you approach your next monthly payment.
Even if you and your lender agree on monthly payments, you could pay for the loan more often than that. You just need to make sure that the payments will go towards your principal loan amount rather than the interest. This will ensure that you're reducing the amount of the loan rather than paying unnecessary amounts of interest.
All in all, you shouldn't assume that you can only make one payment each month. Check your documents and ask your lender.
It may reduce the amount of interest that they're bringing in, but it does make you appear like you intend on paying back the loan in full early. So, it's likely to reflect well.
5. Monthly Payment
The monthly payment is the amount that you're required to pay each month towards the loan. This repayment amount includes the principal payment and the interest payment for that month.
As you're paying monthly payments, you're going to be paying more principal over time. To be clear, this means that your first several payments towards your auto loan are going to have a large amount of interest attached to them. So, as the loan goes on, you'll pay more and more of the principal.
To combat the amount of interest that you're paying, you should try to pay more than your minimum payment every month. You should be sure that this extra amount will go towards your principal amount though.
With most auto loans, any extra money that you pay will go towards the principal payment rather than the interest payment. But, you should check the documentation to be sure.
As you pay more and more on the principal payment, you'll lower the amount that you're paying on interest. And, you'll reduce your debt along the way.
How to Calculate Monthly Car Payments
Before you get your car shipped to you, you should be able to use an auto loan calculator to get your monthly car payments. Even if you only have a vague idea of the amount that you're going to take out, you can use our auto loan calculator formula to figure out what your potential monthly payment may be.
First, you need to know the following pieces of information for the car loan calculator:
- The amount of money that you're borrowing
- The interest rate on your loan
- The term of your loan in months
Using this information, you need to use the following auto loan calculator formula:
A = P * ((r*(1+r)^n) / (((1+r)^n) - 1))
- A = the amount that you'll pay towards the loan each period
- P = the amount that you're borrowing (the principal loan amount)
- r = the monthly interest rate on the loan (the annual interest rate divided by 12)
- n = the total number of payments that you're making
To be clear, n is going to be the number of payments in a year multiplied by the number of years you'll be paying off the loan. So, if you're making monthly payments on a five-year loan, n will equal 60 (which is 12*5).
Let's look at a couple of examples using the car loan calculator. Doing this kind of math by hand can get confusing, but it's important to plan ahead so that you're prepared for the payments that you need to make.
How Much Is a $50,000 Car Payment?
Let's say that your interest rate is 5% for five years. So, r is equal to 0.004 (0.05/12) and n is equal to 60 (12 payments per year times five years).
Since the loan is for $50,000, P is equal to 50,000. Now, we have all of the variables we need for the car loan calculator.
Now, let's start with the fraction since this is the most complicated piece of the auto loan calculator formula. The numerator (top of the fraction) calls for the following: (r*(1+r)^n).
With our example, this comes out to (0.004*(1+0.0004)^60):
- 1 + 0.004 = 1.004
- 1.004^60 = 1.27
- 1.27 * 0.004 = 0.005
The denominator (bottom of the fraction) of the car loan payment calculator calls for the following: ((1+r)^n) - 1. With our example, this comes out to ((1 +0.004)^60) - 1:
- 1 + 0.004 = 1.004
- 1.004^60 = 1.27
- 1.27 - 1 = 0.27
Now, you should divide the top of the fraction by the bottom of the fraction in the auto loan calculator formula. So, 0.005/0.27 is 0.019.
Then, you should multiply the entire thing by P, which is 50,000 for this example. So, 0.019*50,000 = 941.
This means that the monthly payment for a five-year, $50,000 car loan with a 5% interest rate would be about $941.
Keep in mind that this car loan payment calculator works for fixed interest rates. Your monthly payment is going to differ each month if you have a variable rate loan.
How Much Is a $45,000 Car Payment?
Let's look at another example with a $45,000 loan. With this example, we'll make the interest rate 10% and say that the term is 72 months. This means that r is equal to 0.008 (0.10/12) and n is equal to 72.
Since you'd be taking out $45,000, P is equal to 45,000.
Again, we're going to start with the top of the fraction: (r*(1+r)^n). With our example, we'll get the following: (0.008*(1+0.008)^72):
- 1 + 0.008 = 1.008
- 1.008^72 = 1.818
- 1.818 * 0.008 = 0.0145
The bottom of the fraction asks us to find ((1+r)^n) - 1. After putting in our variables, we'll get ((1+0.008)^72) - 1:
- 1 + 0.008 = 1.008
- 1.008^72 = 1.818
- 1.818 - 1 = 0.818
Now, divide the top by the bottom in the auto loan payment formula. In our example, you'll divide 0.0145 by 0.818. This gives us 0.01778.
Then, you should multiply that by P, which is 45,000 in our example. After doing that, you'll get $800. This is the monthly payment that you could expect on a $45,000 auto loan that has an interest rate of 10% and a term of 72 months.
As you may be able to tell from these examples, each factor in your auto loan will make big differences in the monthly payments that you have to pay each month. When you can, put more money down ahead of time, negotiate for a lower interest rate, and shorten the length of the loan.
How Do You Calculate the Interest Rate on a Car Loan?
If you're trying to figure out what kind of interest rate you may get on your car loan, you need to consider your current credit score. In addition, you need to know whether you're looking at new cars or used cars.
In general, higher credit scores get you lower interest rates. And, used cars tend to have higher interest rates than new cars.
Depending on your credit score, you're going to be in one of the following categories:
- Superprime: 781-850
- Prime: 661-780
- Nonprime: 601-660
- Subprime: 501-600
- Deep subprime: 300-500
Borrowers with superprime credit scores are much more likely to get lower interest rates than borrowers with deep subprime credit scores.
If you're borrowing money for a new car, here are the average APRs that you should expect based on your credit score:
- Superprime - 2.41%
- Prime - 3.54%
- Nonprime - 6.64%
- Subprime - 10.81%
- Deep subprime - 14.66%
You can see the large difference in interest rates that come with different credit scores. And, based on our calculations earlier, you can see how a large interest rate makes a large difference in your monthly payment.
If you're borrowing money for a used car, here are the average APRs that you should expect based on your credit score:
- Superprime - 3.71%
- Prime - 5.54%
- Nonprime - 10.43%
- Subprime - 17.26%
- Deep subprime - 21.07%
The difference in interest rates between those with low credit and those with high credit is even more noticeable here. And, you can see that used cars definitely have higher interest rates.
Is a 72-Month Car Loan Bad?
A 72-month car loan is standard. In fact, it's one of the most popular car loan terms right now.
A 72-month car loan gives you six years to pay off the loan. And, depending on the amount of money that you're borrowing, a six-year term may be what you need to pay off the loan on time.
If you can pay off the loan even faster, that's better. And, with most 72-month auto loans, you can make larger payments to pay off the loan faster. This is a great way to lower interest payments and save money.
So, no. A 72-month car loan isn't bad. But, if you don't want to be paying off the loan for that long, you can pay it off in a shorter amount of time.
And, if you're moving during that loan term, you can count on Nexus to get everything from one place to the other.
What Is a Good Interest Rate for an Auto Loan?
Interest rates vary by lender, credit score, and loan type. So, there is no definite 'good' interest rate. Rather, it's important to shop around so that you know you're getting the best deal from your auto lender.
The interest rate offers that you get from different lenders are going to depend on a few factors:
- The Federal Reserve interest rate
- Your credit score
- Your debt-to-income ratio
- The type of loan that you're wanting to get
- The loan term that you're applying for
The best way to determine whether or not you're getting good offers is to look at average interest rates. We listed those above when talking about your credit score and how it can determine the interest rate that you get on a loan.
However, because your credit score isn't the only factor that lenders take into consideration, you should compare the offers that you get. Your offers are likely to be close to one another assuming that you're giving all of these lenders the same information.
Once you've gotten offers from different lenders, you can calculate which offer helps you save the most money. You can do this by using the formula that we mentioned earlier.
What Interest Rate Can I Get on a Car Loan With a 700 Credit Score?
According to current interest rates trends, you should be able to get an interest rate between 2% and 4% on a new car if you have a credit score of at least 700. For a used car, the interest rate would fall somewhere between 3% and 6%.
Compared to the 10% and 15% interest rates that lower scorers get, this is a great deal. But, you have to keep in mind that it comes down to more than your credit score.
Yes, your credit score makes up the majority of the interest rate decision. But, the lender has to consider your current income, debt, and more before they can guarantee anything.
Is 2.9% a Good Car Loan Rate?
2.9% is phenomenal when compared to today's average auto loan interest rates. Staying below 5% is an achievement these days. And, if you have a credit score above 650, it's possible.
If you're looking to take advantage of low interest rates like this one, you need to make sure that you're talking to several lenders. With more information, you can ensure that you're making the most financially sound decision.
Why Should I Pay Off My Auto Loan Early?
We've been talking over and over again about paying off your auto loan early. But, why does this matter? If you're making a deal with a lender to pay off the loan, why should you bother paying off that loan earlier than the lender and you agreed upon?
Well, the benefits to paying off the loan early could outweigh any risks that you may be taking to do so. There are plenty of financial and mental benefits to getting rid of this loan.
Save More Money
Whether you're making a few, larger payments or finishing the loan with a lump sum, you'll be saving yourself money.
Your monthly auto loan payment consists of the principal payment and the interest payment. By paying a larger amount towards the loan, you're paying more towards the principal. Since lenders calculate the interest payment from the amount of principal left, a lower principal can lead to a lower interest payment.
In both scenarios, you're shortening the term length of the loan. So, you're lowering the amount of interest that you're having to pay over time.
And, once you've completely paid off the principal amount, you no longer owe any interest even if the original term was longer.
We should note that this all changes when it comes to precomputed interest loans. While these are uncommon, some lenders still use these kinds of auto loans.
Precomputed interest loans include a pre-calculated amount of interest. This means that the amount of interest that you're paying will remain the same whether you pay it off early or on time. So, if you do pay it off early, you're likely to still be liable for the remaining amount of interest on the loan.
Loosen Your Budget
If you finish paying off your auto loan early, you'll have one less payment to worry about each month. So, even if you dropped a lump sum to pay off the loan, you'll have more flexibility with your money later.
You can use this extra space in your budget to save or spend. Either way, you'll have more freedom than you previously did in your budget.
If you have other debt to pay off, we highly recommend starting there. Getting rid of all of your loan payments will free up your budget tremendously.
Avoid Overpaying
Taking out an auto loan is a great way to help people pay for a car over time. Most of us can't drop tens of thousands of dollars on the spot.
However, these kinds of loans can lead to us spending more than the vehicle is worth in the first place. Cars depreciate quickly and it's likely that you're going to end up paying more than the car is worth in the first place. This is especially if you opted for buying a new car.
If you are paying more than the car is worth, this is called "going upside down on your car loan." It causes you to have negative equity in your car.
By paying off your car loan early, you can ensure that you're not going to have this problem.
Other Considerations
While paying your auto loan early is great, it's not for everyone. There are a few instances when you should continue to pay off your loan as normal.
First, you should avoid paying off your loan early if the prepayment penalties are severe. Some lenders don't like people paying off their loans early because of the loss in interest that they experience. So, there are prepayment penalties in some lending contracts.
Prepayment penalties are financial penalties that add to the payment amount that you would need to pay off the loan in full. This fee/penalty helps cover some or all of the interest that the lender may be losing out on as a result of you paying off the loan quickly.
If this penalty is too large, it may not be worth paying off the loan early.
It's also important to consider the other kinds of debt that you may have. If you're dealing with multiple loans, credit card debt, or other financial barriers, you should focus on the largest interest rates first.
So, if you have credit card debt, you should pay that off first. As you're paying off that debt, you should focus on making minimum payments for the rest of your accounts to ensure that you don't harm your credit score.
Think about your credit score, too. It may be more advantageous for younger individuals to keep a long-term loan even if they can pay it off.
The credit history that they get from this kind of loan is worth more than the interest that they'd have to pay on it. By paying off the loan early, you aren't boosting your credit score. Rather, you're removing history that you could make with paying future payments on time.
Lastly, you should think about your finances. It may feel great to pay off the loan early, but you shouldn't do it if it'll hurt your savings.
Is It Better to Get an Auto Loan From a Bank or Dealer?
With all of this talk about interest rates and getting the best deal while buying a car, it's important to determine whether you should be looking at banks or dealers for auto loans. The answer is 'it depends.'
We've shared many times that it's important to shop around for the best interest rate. Whether you're getting a new car or a used car, you want to make sure that you're getting the best deal possible.
We recommend getting a quote from a couple of banks before going to look for cars at the dealership. Once you've found the car that you want at the dealership, you can ask for a quote from there.
Then, you should compare your options. All in all, you should search for the best terms for you.
Start Searching for the Right Car
With all of this talk about auto loan calculators, new cars, used cars, and interest rates, we bet you're ready to get started. Once you've found the car of your dreams and found the best financing option for you, you need to get that car to you.
And, that's where we come in. Our team here at Nexus is filled with experts on auto transportation services.
Be sure to reach out when you're ready to get your next vehicle.
