Is 8 years too long to finance a car?

Car Loan Calculator

Input a few numbers to see how much a car loan might cost:

• Car price: This is the total amount you intend to finance, including the base cost of the vehicle, any upgrades, warranties, or other packages, plus taxes and fees.
• Down payment: This is the amount of cash you’ll use to buy the car—you’ll have to finance the difference between your down payment and the car price. If you’re trading in a car, put the value of that vehicle here.
• Loan term: This is how long it takes to pay off the loan. Along with the interest rate, it determines the total cost of the loan.
• Interest rate: The interest rate is used to calculate what you pay the lender to borrow the money. Along with the term, it determines the total loan cost.
• Credit score: If you’re not sure about the interest rate of your loan, you can use your credit score to estimate the rate. The estimates are based on the average interest rates for new car loans by credit score according to Experian data from the second quarter of 2020. Keep in mind that if you are getting a used car loan, your interest rate will be higher.

Based on the inputs above, the calculator determines the following:

• Monthly payment: This is how much you owe your lender each month. The payment comprises principal and interest.
• Loan amount: This is the principal of the loan—the amount you finance.
• Total interest paid: This important number shows how much you’d pay to finance the vehicle. Generally, longer loan terms come with higher interest rates, meaning the loan is more expensive by the time you pay it off (though the monthly payment is typically lower).
• Total paid: This is how much you’d pay the lender over the life of the loan (total principal paid plus total interest paid) and indicates the true cost of your car.

How Is Interest Calculated on a Car Loan?

Although you make one monthly payment, the lender splits it into two parts—interest and principal. Your interest payment goes to the lender. It’s the price you pay for borrowing money. The principal amount goes toward paying down the cost of the car itself.

Interest payments are calculated based on the remaining balance of the loan. Over time, as you pay down the balance, the interest payments get smaller. And since the monthly payment is unchanged, more of each payment goes toward paying down principal. This is a process known as amortization.

Here’s how it works for a sample 12-month $10,000 loan with a 4.5% APR:

If you want to do the math by hand, here’s how to do it step by step, along with an example:

1. Figure out your monthly interest rate: Take the APR (annual percentage rate) and divide it by 12. For example, a 4.5% APR would translate to 0.00375 (0.045/12).
2. Calculate your interest payment: Multiply the monthly interest rate by the remaining balance to see how much of your payment goes toward interest. For example, the first interest payment on the schedule above would be $37.50 ($10,000×0.00375=$37.50).
3. Calculate your principal payment: Subtract the interest payment from the total monthly payment. For example, the first principal payment above would be $816.29 ($853.79–$37.50).
4. Calculate your remaining balance: Subtract the principal payment from the balance. For example, after you make your first payment, the outstanding balance would be $9,183.71 ($10,000–$816.29).

What Is a Good APR for a Car Loan?

A good APR for a car loan is around 3.24%, based on Q2 2020 information from credit bureau Experian.   Most people aren’t paying that little, though. The average APR for a new car in June 2020 was 4.93%.   For a used car, it was 9.25%.

One of the biggest factors in determining your APR is your credit score. Here’s what average rates looked like on new car loans in Q2 2020, by credit score:

Other factors also play into your interest rate, such as:

• Your lender: Some lenders simply charge more than others.
• Your term length: The longer your term length, the higher your interest rate (generally).
• Used vs. new car: Loans used to buy new cars tend to carry lower interest rates than those on loans used to buy used cars.

How Can I Calculate My Car Payment?

Your monthly car payment is calculated by dividing the total paid over the life of the loan by the number of months in your loan. For example, if you finance $20,000 to purchase a car, and you pay $5,000 in interest (for a total loan cost of $25,000) over the course of a five-year loan, your monthly payment would be $416.67 ($25,000 divided by 60 months).

Where Can I Get a Car Loan?

There are many places you can get a car loan.

• Buy-here-pay-here dealerships: These dealerships lend the money themselves. These loans come with high rates and are typically marketed toward customers with poorer credit.
• Dealerships: Not to be confused with those above, more reputable dealerships often work with partner lenders who lend the money.
• Credit unions: Most credit unions offer auto loans, although you need to meet membership criteria in order to join.
• Banks: Similarly, banks offer auto loans, and there are usually no membership requirements, although rates tend to be a bit higher than at credit unions.
• Online lenders: Some online lenders also offer auto loans.

Should I Use an Auto Loan Calculator?

Yes, it’s always a good idea to use an auto loan calculator before you start shopping. This lets you see how much you can reasonably afford, better prepares you to negotiate at a car lot or dealership, and helps you understand what’s the best auto loan for you.

You can also play around with the numbers by changing the variables to see how they affect the monthly payment, total interest, and total paid. For example, try plugging in a shorter loan term to see if you can afford the payments and if you’d pay less overall.

What Are the Most Common Term Lengths?

According to data from Experian, here is the percentage of people opting for different term lengths in Q2 of 2020:

• 49–60 months: 15.7%
• 61–72 months: 39.9%
• 73–84 months: 35.1%
• 85–96 months: 4.8%

Note

Keep in mind that just because longer-term loans are becoming more common, according to Experian, that doesn’t necessarily mean they’re a good idea. There are a lot of things to consider when choosing a long-term auto loan.

Using a car loan calculator is just one step in making a smart financing decision. Once you get a sense of how the loan works, it’s smart to get preapproved for an auto loan before you go to the car lot. This gives you far more negotiating power than theoretical numbers spit out by a calculator.

Frequently Asked Questions (FAQs)

Can I refinance a car loan?

You can refinance a car loan at any point, and doing so can save you money each month by giving you a lower interest rate. However, if your new loan lasts longer than your current loan would have, you may pay more in interest in the long term. Refinancing for a loan with a lower interest rate and the same or shorter term length will save you money immediately and over the length of your loan.

What is an upside-down car loan?

An upside-down car loan is one where the balance of the loan is higher than the value of the car. This can happen because you take out a large loan to buy a car that depreciated quickly, due to accidents that damage your car, or if you trade in your car too early. If you sell your car when you have an upside-down loan, you won’t make enough to pay back your balance.

How long can you finance a car?

Financing a car is an exciting milestone, however, there are many factors to consider before driving off the lot. Most car buyers require financial assistance for some, or all, of their car purchase in the form of a car loan. The length of the loan can be adjusted to the monthly payment amount that may be right for you depending on how long you plan on keeping your car and how quickly you’d like to pay it off.

What’s the longest you can finance a car?

While the typical car repayment term is 72 months, the range of repayment terms can be as short as 12 months and as long as 96 months, though not all lenders will provide the shortest- or longest-term options.

If you take out a shorter repayment term, you’ll typically have higher monthly payments with lower interest rates, and you’ll generally pay less in interest to your lender over time. If you take out a longer repayment term, you will usually have lower monthly payments with higher interest rates, typically costing you more in total over time.

The repayment term you ultimately choose will be determined for the most part by your cash flow. If you have a higher income and few debts, you may opt for a shorter repayment term, which comes with a higher payment. If you have a lower income and several debts, you may prefer a longer-term loan. You’ll have a lower payment with the longer term but will pay more in interest over the life of the loan.

Can I sell a financed car?

As mentioned previously, the average loan term is currently 72 months. However, a lot can change over the course of six years, including your driving needs. What if you see a new car model out there that you just must have? Or maybe your current car is showing its age and you’re just tired of it. Don’t worry. You don’t have to keep your current car until the loan is paid off.

If you want to get rid of a financed car, you can sell it at any time to a private party or dealer, pay off any outstanding amount on your loan, and use the cash left over for whatever you want, possibly your next car. Or, to streamline the new car process, you could trade your current car to your dealer for a new car. The dealer and you will agree on the traded car’s value, and that amount will be applied to the purchase of your new car, minus any amount that still might be due to a current lender.

In some cases you may be in negative equity status, a very common situation, which means you owe more on your current car than it’s worth. This is not always a deal breaker. If you have cash on hand, you can pay off the current car and proceed with the sale. If you’re trading with a dealer, the dealer’s finance department may be able to work out a transaction that pays off your current lender and adds negative equity to your new financing.

Auto finance mini glossary

The following are some helpful definitions to know as you shop for a car, weigh your financing options and determine your loan repayment term:

• Amortization: To pay for something in installments over a period of time.
• Annual Percentage Rate (APR): The annual rate that you pay for borrowing money expressed as a percentage.
• Equity: A car’s market value above any amount owed on the loan.
• Down payment: The amount of money you pay up front to reduce the amount financed.
• Lien: A property claim on the vehicle typically held by the lender until you repay the amount owed.
• Trade-in allowance: The amount the dealer agrees to pay to purchase a trade-in car.

The bottom line

While you can finance a car for up to 96 months, how long you finance a car really depends on your unique needs, wants and cash flow. Some shoppers opt for a shorter loan term that comes with higher monthly payments and reduces the total cost of the loan. Others opt for a longer loan with lower monthly payments to assist with cash flow, paying more over time.