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How Are Auto Loans Calculated? (And Why You Should Care)

Learn how auto loans are calculated and why knowing the reason behind it is essential.

When shopping for an auto loan, you know that you want the best rate and the lowest payment you can get. But do you ever stop to think about how auto loans are calculated? If not, it's time to have that conversation! There are calculations behind the amount and various factors that help determine what it should be.

Before looking further at how auto loans are calculated, it's important to understand the factors that go into this calculation:

  • Vehicle price
  • Sales tax
  • Trade-in value (if applicable)
  • Down payment (if applicable)
  • Dealer fees
  • Rebates or incentives (if applicable)
  • Annual percentage rate (APR)
  • Auto loan term

How Are Auto Loans Calculated?

Calculating the cost of an auto loan involves following a mathematical formula. It might not be as simple as 1+2=3, but the concept is the same!

If you take the factors listed in the previous section and plug them into the right spot in the equation, you will get your monthly auto loan rate. There are auto loan calculators that can give you an idea of this amount, but understanding the how behind the calculations is essential as well.

First, it's important to note that an auto loan is an amortizing loan. This means that you pay back the amount of your loan plus interest. Your payments are the same each month and include the principal balance plus interest. Each payment you make will be the same; however, as you make more payments, you will pay more towards the principal and less toward interest.

Again, you can choose to use a calculator or rely on your lender to calculate your auto loan payment, but it's good to understanding the mechanics behind how and why auto loans are calculated the way they are.

Importance Of Knowing How Auto Loans Are Calculated

Now you may still be wondering why this even matters. Here's the deal.

You should understand how various factors impact your auto loan so you can make the best choices regarding your down payment, car prices, add-ons to your purchase, etc.

Auto Loan Term

For example, you might think that stretching your term out to 96 months is a good idea without knowing that the longer your term, the higher your interest rate and the more you'll pay over the length of your loan. Without this information, you could make the blind decision that you need to make your loan payment as small as possible without looking at the whole picture!

Loan #160 Months
Loan Amount$25,000
Interest Rate3.11%
Monthly Payment $555
Total Cost of Car Loan


Loan #272 Months
Loan Amount$25,000
Interest Rate3.11%
Monthly Payment$381
Total Cost of Car Loan$27,437

Auto Loan APR

Another example is not understanding how much your APR can impact your monthly payment. That's why you must get your APR down as low as possible before you get an auto loan. It can save you thousands of dollars throughout your loan term!

Loan #13.11% APR
Loan Amount$25,000
Loan Term60 Months
Monthly Payment$450
Total Cost of Car Loan$27,026

Loan #210.11% APR
Loan Amount$25,000
Loan Term60 Months
Monthly Payment$533
Total Cost of Car Loan$31,952

Auto Loan Principal

One final example relates to what makes up your principal loan amount. You might only consider the sticker price of the car, but the principal loan amount is the sticker price + fees + taxes + maintenance or insurance add-ons, which can easily increase your principal loan amount by a few thousand dollars.

The comparison below demonstrates how much an additional $5,000 can impact your monthly payment and total cost of the car loan.

Loan #1$20,000
Loan Term60 Months
Interest Rate3.11%
Monthly Payment$360
Total Cost of Car Loan$21,621

Loan #2$25,000
Loan Term60 Months
Interest Rate3.11%
Monthly Payment$450
Total Cost of Car Loan$27,026

Understanding Auto Loan Calculations

Now that you’re aware of why you should care about how auto loans are calculated don't stop there! Before you get your next auto loan or refinance your current vehicle, you want to be fully knowledgeable about the ins and outs of auto loan financing so you can get the best deal and make the right choices.

Here are additional resources you can refer to that provide helpful information about auto loans:

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  • The Great Giveback Official Rules

    1. Eligibility: No purchase or obligation necessary to participate and win. All participants must be 19 years of age or older at time of contest participation. Employees of Listerhill Credit Union are not eligible to register for the contest.

    2. How To Enter the Contest: All Listerhill members who have consumer loans in good standing, (subject to limitations below) are automatically entered. Anyone who takes out a new loan with Listerhill Credit Union, or refinances a loan from another lender with Listerhill Credit Union (subject to limitations below) will automatically be entered to win. Limit of one entry per loan.

    NO PURCHASE NECESSARY: To enter the contest without a loan, send a self-addressed, stamped envelope to: Listerhill Credit Union, P.O. Box 566, Sheffield, AL 35660, Attn: Great Giveback Contest Entry. Limit one entry per person. Written entries must be received no later than July 3, 2021.

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    4. Determining the Winner: A Credit Union employee will select at random four (4) $500 winners (one per day July 12-15) and one Grand Prize Winner from all entries received on July 16, 2021. You do not have to be present to win.

    5. Prizes: $500 Cash Prize: the Credit Union will award four (4) members with $500 cash each. Grand Prize: The Credit Union will pay up to $25,000 toward your loan with Listerhill Credit Union, or combination of loans. No loan payments will be made to loans with any other lender. No cash equivalent provided, and the total prize amount may be less depending on the outstanding amount of loan balance(s) with Listerhill Credit Union. In no event will the prize awarded exceed the total amount of the winner’s outstanding balance of qualifying loans with Listerhill Credit Union. Federal, state and local taxes are the sole responsibility of the winner. IRS regulations require the Credit Union file a 1099 on behalf of the winner.

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    6. To be eligible to win, all loans must be in good standing (not more than 30 days past due at the time of drawing. Eligible loans are limited to auto loans (no indirect dealer loans), personal loans (no loans secured by real property, such as mortgages, 2nd mortgages, and Home Equity Lines of Credit) and recreation loans made to consumer borrowers (not business or commercial loans).

    6. Participation. By participating, entrants agree to be bound by these Official Rules and the decisions of the Contest. Except where prohibited, acceptance of any prize constitutes winner's consent to the publication of his or her name, biographical information and likeness in any media for any commercial or promotional purpose, without limitation the Internet, or further compensation. Prizes not won and claimed by eligible winners in accordance with these Official Rules will not be awarded and will remain the property of the Credit Union.