How to use the Car Loan
- Enter the vehicle price, then subtract your deposit and any trade-in value.
- Enter the annual interest rate quoted by the lender.
- Enter the term in months — commonly 36, 48, 60 or 72.
- Compare two terms side by side to see the total interest difference.
How the calculation works
Car loans are standard amortising loans: the payment is fixed, and each instalment splits between interest on the outstanding balance and principal reduction. The formula is P = L × r / (1 − (1 + r)^−n), where r is the monthly rate and n the number of payments. Because interest accrues on the declining balance, early payments are interest-heavy and later ones principal-heavy.
Extending the term lowers the payment but raises total interest, and it also extends the period of negative equity. Cars depreciate fastest in the first two to three years — often 20% in year one — so on a 72 or 84 month loan the balance can exceed the vehicle's value for years. That matters if the car is written off or you need to sell, because the shortfall is still owed. A deposit of 10 to 20% shortens that window considerably.
Payment = L × r / (1 − (1 + r)^−n), where L = amount financed, r = APR/12, n = monthsSource: Standard amortising loan formula. Dealer finance may include fees not reflected in a nominal rate — compare APRs, which include them.
Worked example
A 32,000 car with 4,000 deposit and 3,500 trade-in, financed at 7.4% over 60 versus 84 months.
- Amount financed = 32,000 − 7,500 = 24,500.
- 60 months at r = 0.0061667: payment ≈ 489.86, total interest ≈ 4,892.
- 84 months: payment ≈ 375.10, total interest ≈ 6,998.
The longer term saves about 115 a month but costs roughly 2,106 more in interest, and leaves you in negative equity far longer.
Frequently asked questions
Is a longer car loan term a bad idea?+
It lowers the monthly payment but increases total interest and keeps you in negative equity longer, since the car depreciates faster than the loan amortises. Choose the shortest term you can comfortably afford.
How much deposit should I put down?+
10 to 20% of the price meaningfully reduces both the interest paid and the period during which you owe more than the car is worth.
Should I compare the rate or the APR?+
The APR, because it includes arrangement fees. A low headline rate with fees attached can cost more than a slightly higher rate without them.
Does the payment include running costs?+
No. Insurance, tax, fuel, servicing and tyres are separate and often approach the loan payment itself — budget for the total cost of ownership, not just the finance.
Last reviewed August 31, 2026. We review this page whenever the underlying formula, tax year, published rate or standard changes.