The Car Loan Payment Formula
The monthly payment for a fixed-rate auto loan is calculated using standard amortization:
M = P × [r(1 + r)ⁿ] ÷ [(1 + r)ⁿ − 1]
Where M = monthly payment, P = loan amount, r = monthly rate (APR ÷ 12), and n = term in months. Each payment covers interest accrued on the remaining balance, plus principal. Early payments are mostly interest; later payments are mostly principal.
Example: $24,000 loan at 7% APR, 60 months. Monthly payment: $475.33. Total interest over 5 years: $4,520 — about 19% of the loan amount.
Why Loan Term Matters More Than Rate for Many Buyers
Lowering the APR by 1% on a $24,000 loan saves roughly $720 in interest over 60 months. Choosing a 48-month term instead of 60 months (at the same APR) saves about $955 in interest — while paying off the loan a full year sooner.
The monthly payment difference between 48 and 60 months is approximately $101 ($574 vs. $475). Whether that tradeoff is worthwhile depends on your cash flow, but focusing only on the monthly payment often leads buyers toward longer terms than are financially optimal.
The 20/4/10 Rule
A practical guideline: put at least 20% down, keep the loan term to 4 years or fewer, and spend no more than 10% of monthly gross income on all car expenses (payment, insurance, fuel combined).
On a $50,000 annual gross income (roughly $4,167/month), the 10% ceiling is about $417/month for all car expenses. This includes the loan payment, insurance, and fuel. A $400/month loan payment alone leaves little room before hitting that ceiling. The rule flags when a vehicle is too expensive relative to income — not as a hard limit, but as a useful reference point.
How to Read the 5-Year Ownership Cost
The 5-year total includes loan payments (capped at 60 months — if your term is longer, you're still making payments in year 6), fuel, insurance, maintenance, and depreciation. Depreciation is typically the largest single line item for new vehicles.
The default inputs are 0 — fill in what you know. Even a partial estimate (insurance and depreciation only, for example) gives a more realistic picture than the loan cost alone.