How Are Auto Loans Calculated?

Buying a car can be one of the most expensive purchases you make. If you decide not to pay cash outright, you might stop to think about how auto loans are calculated.

When shopping for an auto loan, you know that you want the best rate and the lowest payment you can get. Read on to learn how to calculate your loan payments and interest rate before deciding on a new ride!

Key Terms to Know

To further understand how your auto loan is calculated, you’ll want to understand a few key definitions.

APR vs. Interest Rate

Annual percentage rate (APR) and interest rate are two figures to know when trying to understand how your auto loan is calculated. APR represents the total cost to borrow money. This includes your interest rate but also any other fees associated with the loan. The interest rate by itself is only the amount charged for borrowing the money.

When comparing how auto loans are calculated, you’ll want to keep a close eye on the APR. Since this is the total cost of the loan, it will allow you to see the differences between loans and make the best choice for your situation.


Amortization means spreading your payments out over a set amount of time. At the beginning of your car payment schedule, a significant portion of your payment goes toward interest. As you pay it off, more of your car payment will go toward paying off the principal.

Fixed vs. Variable-Rate Loans

Depending on your financing, your auto loan interest is calculated differently. One of the key factors that affect this is whether your loan is a fixed rate or variable rate.

A fixed-rate loan means that your interest rate will remain the same for the entire life of the loan. This can give peace of mind to borrowers because they won’t have to worry about their rates going up. A variable-rate loan is one where the interest rate can change, typically fluctuating with a specified financial index.

Most auto loans are calculated at a fixed rate.

Your Loan Payment Term and Rate

You know that the higher your interest rate, the more total interest you’ll pay. But the length of your loan also affects your car loan payment.

If you choose a loan with a longer repayment term, you’ll have lower monthly payments because of the longer repayment time frame. If you decide to choose a loan with a shorter term, your monthly payments will be higher, but you’ll pay less interest over the life of your loan. This, in turn, can help you save a significant amount of money!

For example, you borrow $20,000 (around the price of a used vehicle) using a loan with a 5% interest rate and a 48-month loan term. In this scenario, your monthly payments would be around $461. But if you take 60 months to repay your loan with the same interest rate, your monthly payment will be just $377 at the same interest rate for the same vehicle.

Getting the Best Rate

Another one of the best ways to save money is getting a car loan with the best possible interest rate. To do this, start early and shop around. Comparing interest rates among various lenders allows you to find the best rate and avoid taking out an overpriced car loan.

Once you find several car loans you like, apply for pre-approval. Pre-approval can help you set a budget and give you bargaining power at the dealership. It’s highly recommended to get an auto loan pre-approval before car shopping!

Calculate Auto Loans With a Car Loan Payment Calculator

Looking at only the mechanics, you know that taking out an auto loan means you will be paying back the amount of your loan plus interest. You make the same payments each month to pay off the interest and pay down the principal. Eventually, you will be paying more toward the principal and less toward interest.

But what if you want some specifics? Check out our car loan payment calculator!

This online calculator will let you enter different loan amounts, interest rates, monthly payments, term length, and more. Play around with it and see what numbers work best for you. This helpful tool is based on the purchase price of your car and the total loan amount. Keep in mind that your total loan amount could be less if you decide to bring in the value of a trade-in car.

By using an auto loan payment calculator before you head to the dealer, you’ll be in a stronger position to negotiate and walk away with a loan that works for you.

Calculate Your Auto Loans With Radiant

At Radiant Credit Union, we work with you to ensure your success. As a credit union, we are owned by our members and return our profits to you through lower interest rates, favorable fee structures, and higher dividends.

Let Radiant help make your car dreams come true. We are here to work with you. Learn more about our auto loan options today!