How to Calculate Car Loan Payments
Learn what determines a car loan repayment, how interest and amortisation work, and why the lowest monthly payment isn't always the lowest-cost way to finance a car.
Calculate your car loan →What determines your car loan payment?
A car's purchase price is only the starting point. Your repayment depends on how much you actually borrow, the interest rate, the length of the loan and the way the finance agreement is structured.
A larger deposit usually means borrowing less. A lower interest rate generally reduces interest cost. A longer term can reduce the regular repayment, but keeping the debt for longer can increase the total interest paid.
The standard car loan repayment formula
A common fixed-payment amortising loan can be calculated using the standard loan-payment formula:
For a monthly repayment calculation, the annual nominal interest rate is commonly converted to a monthly rate and the term is converted into the total number of monthly payments.
Fees, compounding conventions, payment timing, variable rates, balloon payments and lender-specific rules can make the actual repayment differ from a simple formula.
Example: financing a $40,000 car
Suppose a car costs $40,000 and you contribute a $5,000 deposit. Ignoring fees for this example, you borrow $35,000 at a fixed 7% annual rate for five years with monthly repayments.
These figures assume the rate remains unchanged, payments are made monthly and on time, and there are no additional fees or balloon payment. They illustrate the repayment formula rather than a specific finance offer.
Why principal and interest change over time
With an amortising loan, each repayment is divided between interest and principal. Interest is calculated against the outstanding balance, while the principal portion reduces what you owe.
Early in the loan, the balance is larger, so more of a typical fixed payment goes toward interest. As the balance falls, less interest is charged and more of the payment can reduce principal.
The exact split depends on the loan. The graphic above is illustrative, not an amortisation schedule for the worked example.
Why loan term matters
Extending the term spreads repayment of the principal across more payments. That can make each repayment smaller, but it also keeps money borrowed for longer.
Debt is repaid faster and, all else equal, less time is available for interest to accumulate.
The regular payment may be easier to fit into a budget, but total interest can be higher.
Look beyond the regular repayment and check the total amount payable, fees and loan conditions.
This is why choosing finance solely because it produces the smallest monthly payment can be misleading. Compare both the repayment and the overall cost.
How a deposit or trade-in changes the loan
A cash deposit reduces the amount you need to finance. A trade-in may also reduce the amount financed, depending on its value and whether there is existing finance to settle on the vehicle.
Borrowing less generally means a lower repayment and less principal on which interest can be charged. But make sure you understand the complete transaction rather than looking at the trade-in figure in isolation.
Depending on the contract, fees, add-ons or other costs may be financed rather than paid upfront. Financing additional costs means you may also pay interest on them.
What is a balloon or residual payment?
A balloon payment leaves a larger lump sum to be paid at the end of the loan rather than paying the entire financed balance down through the regular repayments.
Regular repayments can be lower because part of the amount remains outstanding for the end of the term.
The remaining balloon must still be dealt with according to the contract — for example, paid from available funds or refinanced if finance is available.
Lower regular repayments therefore do not automatically mean cheaper finance. MoneySmart notes that with a balloon payment you still pay interest on the lump sum, and the total loan cost is generally higher.
Compare more than the advertised interest rate
The headline interest rate matters, but it isn't the only cost that can affect a car loan. Depending on the lender and country, a loan may also include establishment, administration, broker, early repayment, late payment or other fees.
For Australian car loans
Australian borrowers can also use the comparison rate when comparing credit products. A comparison rate combines the interest rate with most fees and charges into a single percentage figure.
It is a useful comparison tool, but make sure you're comparing equivalent loan amounts and terms and check the assumptions behind the advertised comparison rate.
How much car payment can you afford?
There isn't one universal percentage of income that makes a car loan affordable for everyone. Household expenses, other debts, savings, income stability and the ongoing cost of owning the vehicle all matter.
Instead of relying on a fixed rule such as “spend no more than X% of your income”, put the proposed repayment into your actual budget and include costs such as insurance, registration, fuel or charging, servicing, tyres, parking and repairs where relevant.
Consider whether the repayment would still fit your budget if expenses increased, income fell temporarily or a variable interest rate increased.
How this guide was prepared
CalcNest uses the standard amortising-loan relationship for its worked repayment example and checks consumer-finance explanations against authoritative sources.
Primary references
Consumer finance guidance: ASIC MoneySmart guidance on car-loan costs, fees, balloon payments and Australian comparison rates, alongside CFPB guidance on auto-loan amortisation and repayment structure.
Consumer Financial Protection Bureau: amortisation, principal and interest behaviour over the life of an auto loan.
Loan terms and consumer-credit rules differ between countries and lenders. Always check the actual credit contract and disclosures that apply to the finance you are considering.
Run the numbers on your own car loan
Compare repayments, total interest and different loan scenarios with CalcNest's Car Loan Calculator.
This guide provides general information and illustrative calculations, not personal financial or credit advice. Actual repayments, rates, fees and loan conditions depend on the lender, product and borrower.