Auto Loan Calculator
Car Buying Tips
- •Get pre-approved before visiting dealerships
- •Keep total car costs under 20% of take-home pay
- •Aim for 20% down to avoid being underwater
- •Shorter terms mean higher payments but less interest
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Understanding Auto Loans
How Auto Loans Work
An auto loan is a secured loan—the car itself serves as collateral. This generally results in lower interest rates compared to unsecured loans. If you fail to make payments, the lender can repossess the vehicle.
Key Factors Affecting Your Payment
Vehicle Price
The total cost of the vehicle, including any dealer add-ons. Negotiate this before discussing financing.
Down Payment
Cash you pay upfront. Larger down payments reduce your loan amount and monthly payment, plus help avoid being "underwater."
Trade-in Value
The value of your current vehicle applied toward the purchase. In most states, you only pay sales tax on the difference.
Interest Rate (APR)
Determined by your credit score, loan term, and lender. Even small rate differences significantly impact total cost.
New vs Used Car Rates
Interest rates typically differ for new and used vehicles:
| Credit Score | New Car APR | Used Car APR |
|---|---|---|
| 781-850 (Super Prime) | 5.0-6.0% | 6.5-7.5% |
| 661-780 (Prime) | 6.0-8.0% | 8.0-10.0% |
| 601-660 (Near Prime) | 9.0-12.0% | 11.0-15.0% |
| 500-600 (Subprime) | 13.0-18.0% | 16.0-21.0% |
Loan Term Comparison
Here's how different loan terms affect a $25,000 loan at 6.5% APR:
| Term | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 36 months | $766 | $2,576 | $27,576 |
| 48 months | $592 | $3,416 | $28,416 |
| 60 months | $489 | $4,340 | $29,340 |
| 72 months | $420 | $5,240 | $30,240 |
| 84 months | $371 | $6,164 | $31,164 |
The 20/4/10 Rule
A common guideline for responsible car buying:
- 20% down payment minimum
- 4 year (48 month) maximum loan term
- 10% maximum of gross income for total car costs (payment + insurance)
Being "Underwater" on a Loan
You're "underwater" (or "upside down") when you owe more than the car is worth. This is a risk with:
- Low or no down payment
- Long loan terms (cars depreciate ~15-20% in year one)
- Rolling negative equity from a previous car into a new loan
Hidden Costs to Consider
- • Sales tax: Varies by state (0-10%+)
- • Registration/title fees: $100-500+ depending on state
- • Insurance: New cars and financed cars cost more to insure
- • GAP insurance: Covers difference if car is totaled while underwater
- • Dealer fees: Documentation, destination, dealer prep
Frequently Asked Questions
How much car can I afford?
A common guideline is the 20/4/10 rule: put at least 20% down, finance for no more than 4 years, and keep total vehicle costs (payment plus insurance) under 10% of your gross income. For example, if you earn $60,000 annually, aim for total car costs under $500/month. Also consider fuel, maintenance, and registration costs in your budget.
Is it better to get a shorter or longer car loan term?
Shorter loan terms (36-48 months) have higher monthly payments but save significantly on interest and help you avoid being 'underwater' on the loan. Longer terms (60-84 months) lower monthly payments but cost much more in total interest, and you may owe more than the car is worth for years. For a $25,000 loan at 6.5%, a 36-month term costs about $2,600 in interest versus $6,200 for 84 months.
What is being 'underwater' on a car loan?
Being underwater (or upside down) means you owe more on your car loan than the vehicle is worth. This commonly happens with low down payments and long loan terms because cars depreciate quickly (15-20% in the first year). If you need to sell or your car is totaled, you'd owe money even after the sale or insurance payout. Gap insurance can protect against this.
Should I get pre-approved for an auto loan before shopping?
Yes, getting pre-approved before visiting dealerships gives you negotiating power and helps you focus on the vehicle price rather than monthly payment. You'll know your interest rate and budget upfront. Compare rates from banks, credit unions, and online lenders. The dealer may beat your rate, but having a backup ensures you get competitive financing.