How to Calculate Interest on a Car Loan

Car loan interest is easy to underestimate because the monthly payment hides it. This guide shows how the interest on a car loan is calculated, from the daily charge to the total over the loan, with a worked example, a comparison of terms and credit tiers, and practical ways to pay less.

How car loan interest works

Most US auto loans are simple interest, amortizing loans:

Interest accrues daily on the balance you still owe.
Your fixed monthly payment covers the interest built up since the last payment, and the rest reduces the principal.
As the balance falls, the interest part of each payment shrinks and the principal part grows.

A few lenders still use precomputed interest, which adds the full interest upfront. Paying early saves less on those loans, so check your contract.

The formulas

monthly payment = P × r ÷ (1 − (1 + r)^−n)
total interest = payment × n − P
interest in a month ≈ balance × annual rate ÷ 12
daily (per diem) interest = balance × annual rate ÷ 365

P is the amount financed, r is the monthly rate (APR ÷ 12) and n is the number of payments.

Worked example

You finance $28,000 at 6.9% APR for 60 months.

Monthly rate: 0.069 ÷ 12 = 0.00575.
Payment: 28,000 × 0.00575 ÷ (1 − 1.00575⁻⁶⁰) = $553.11.
Total paid: 553.11 × 60 = $33,186.81.
Total interest: 33,186.81 − 28,000 = $5,186.81.
First month’s interest: about 28,000 × 0.00575 = $161.00, so $392.11 goes to principal.
Daily interest at the start: 28,000 × 0.069 ÷ 365 = $5.29.

The car loan calculator works out the payment and total interest with tax, fees, your down payment and trade-in included.

How the term changes the interest

The same $28,000 at 6.9%:

Term	Monthly payment	Total interest
48 months	$669.20	$4,121.43
60 months	$553.11	$5,186.81
72 months	$476.03	$6,274.07

Going from 48 to 72 months lowers the payment by about $193 but adds more than $2,150 of interest, and longer loans usually come with higher rates, which widens the gap further.

How your credit changes the interest

Rates vary a lot with credit. On the same $28,000 for 60 months:

At 6.9%: $553.11 a month, $5,186.81 of interest.
At 11.9%: $621.43 a month, $9,285.83 of interest.

That is about $4,100 more for the same car. Checking your rate with your bank or credit union before visiting the dealer gives you a benchmark. If you only have a payment quote, the interest rate calculator reveals the rate behind it.

Ways to pay less interest on a car loan

Choose the shortest term you can afford. It is the biggest lever after the rate.
Make a bigger down payment to borrow less.
Shop the loan separately from the car, and compare dealer financing with pre-approval offers.
Pay extra toward principal. See how much with the auto loan payoff calculator.
Refinance if your credit improves or rates fall.
Watch the add-ons. Warranties and products rolled into the loan accrue interest too.

How your car loan rate is set

Several things decide the APR you’re offered:

Credit score: the biggest factor. Lenders price in tiers, and a higher tier can cut the rate by several points.
Term: longer loans usually carry higher rates.
New or used: used-car loans typically cost more than new-car loans.
Lender type: credit unions are often cheapest, and dealers can arrange financing from many lenders.
Dealer markup: when a dealer arranges the loan, it may add a markup to the lender’s rate as compensation, often limited to around 2 points. On the $28,000 example, 2 extra points (8.9% instead of 6.9%) would add about $1,606 of interest. A pre-approval from your own bank gives you a rate to compare against and to negotiate with.

0% APR or a cash rebate?

Dealers often offer a choice: 0% financing or a cash rebate with a normal-rate loan. Compare the totals:

0% APR on $28,000 for 60 months: $466.67 a month, $28,000 in total.
$3,000 rebate, then $25,000 at 6.9% for 60 months: $493.85 a month, $29,631.08 in total.

Here the 0% offer saves about $1,631. With a larger rebate or a lower outside rate, the rebate can win, so always run both. The car loan calculator makes the comparison quick.

Calculating car loan interest in Excel

Payment: =PMT(6.9%/12, 60, -28000) returns 553.11.
Total interest: =553.11*60-28000, or =PMT(…)*60+28000 because PMT is negative.
Interest in the first year: =CUMIPMT(6.9%/12, 60, 28000, 1, 12, 0) returns −1,780.30.
Rate from a payment quote: *=RATE(60, -553.11, 28000)12 returns 6.9%.

Precomputed interest and the Rule of 78s

On a precomputed loan, the total interest is fixed when you sign. If you pay off early, the lender refunds the “unearned” part, sometimes using the Rule of 78s, which assigns more interest to the early months. On a 12-month loan with $780 of interest, month 1 is charged 12/78 of it ($120) and month 12 only 1/78 ($10). Pay off after six months and you’ve been charged $570, compared with $390 if the interest were simply split evenly. Simple interest loans avoid this problem, which is why they’re better for anyone who may pay early.

Seeing where the interest goes

Because interest is charged on the falling balance, most of it is paid early in the loan. In the example, the first year’s payments include about $1,780 of interest, while the last year’s include only about $240. The amortization calculator shows the full month-by-month split.

Common mistakes

Judging a loan by its monthly payment. A long term can hide thousands in extra interest.
Confusing the interest rate with total interest. 6.9% doesn’t mean 6.9% of the price in total. Over 60 months, it is about 18.5% of the amount borrowed.
Ignoring fees in the APR. Compare loans by APR as well as rate.
Assuming early payoff always saves. On precomputed interest loans, the saving can be small.
Rolling taxes and fees into the loan without noticing. They raise the amount financed, so you pay interest on them for the whole term.
Skipping the pre-approval. Without an outside offer from a bank or credit union, you can’t tell whether the dealer’s rate includes a markup.

Frequently asked questions

How do I calculate the total interest on a car loan?

Multiply the monthly payment by the number of payments, then subtract the amount borrowed. A $28,000 loan at 6.9% for 60 months has a payment of $553.11, so total interest is 553.11 × 60 − 28,000 = $5,186.81.

How is car loan interest calculated each month?

Most car loans use simple interest. Each month's interest is roughly the balance × the annual rate ÷ 12, or, more precisely, the balance × rate ÷ 365 × the days since your last payment. The rest of the payment reduces the balance.

How do I find the interest rate on my car loan?

It is on your loan contract as the APR. If you only know the amount, payment and term, solve for the rate with an interest rate calculator or Excel's RATE function.

Does a longer car loan cost more interest?

Yes. The same $28,000 at 6.9% costs $4,121 in interest over 48 months, $5,187 over 60 months and $6,274 over 72 months, and longer loans often carry higher rates as well.