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Understanding Auto Loans
What is an Auto Loan?
An auto loan is a secured loan used to purchase a vehicle. The car serves as collateral, which typically results in lower interest rates compared to unsecured loans.
- Secured by the vehicle itself
- Fixed monthly payments
- Typically 2-7 year terms
- Lower rates than personal loans
Interest Rates
Auto loan interest rates vary based on several factors including your credit score, loan term, and the age of the vehicle.
- Credit score is the primary factor
- New cars typically get better rates
- Shorter terms usually mean lower rates
- Shop around for the best rates
Down Payments
While not always required, a down payment can significantly reduce your monthly payments and total interest paid over the life of the loan.
- Reduces loan amount and monthly payment
- May qualify you for better rates
- Provides instant equity in the vehicle
- Typically 10-20% of vehicle price
Trade-in Value
Trading in your current vehicle can serve as a down payment and reduce the amount you need to finance for your new car.
- Research your car’s value first
- Compare dealer vs. private sale prices
- Consider tax benefits of trade-ins
- Negotiate trade and purchase separately
Smart Auto Financing Tips
Know your credit score before shopping. A higher score can save thousands in interest over the life of your loan.
Compare offers from banks, credit unions, and dealerships. Pre-approval gives you negotiating power.
Longer terms mean lower monthly payments but more interest paid overall. Find the right balance for your budget.
Your total transportation costs (payment, insurance, maintenance) shouldn’t exceed 20% of your monthly income.