Financing guide
How car loan interest works
Understand APR, principal, loan length and why two loans with the same car price can cost very different amounts.
What is car loan interest?
Interest is the cost of borrowing money. When you finance a vehicle, the lender gives you money to purchase the car and charges interest while you repay the loan.
The amount of interest you pay depends mainly on your loan balance, interest rate and how long you take to repay the loan.
What does APR mean?
APR stands for annual percentage rate. It represents the yearly interest rate applied to your loan.
For example, a loan with an 8.99% APR costs more to finance than the same loan at 4.99%, assuming the other loan details stay the same.
What is principal?
Principal is the amount of money you still owe before interest.
Each monthly payment usually includes both interest and principal. Early in the loan, more of the payment may go toward interest. As the balance decreases, more of the payment goes toward principal.
Why does loan length matter?
A longer loan term can lower your monthly payment, but it usually means you are paying interest for a longer period.
For example, financing the same vehicle for 84 months instead of 60 months may make the monthly payment easier to manage, but the total interest paid can be higher.
Example
Suppose you finance $25,000 at 8% interest.
A shorter loan may have a higher monthly payment, but you can finish the loan sooner and often pay less interest overall.
A longer loan can reduce the monthly payment, but the total cost of the loan may increase.
How a down payment affects interest
A larger down payment reduces the amount you need to finance.
Since interest is charged on the remaining balance, borrowing less money can reduce the amount of interest you pay.
Can you reduce interest after the loan starts?
In many cases, paying extra toward the principal can reduce the balance faster and may lower future interest charges.
You should check your loan agreement to see how extra payments are applied.
Try the car payment calculator
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Try the payoff calculator
If you already have a loan, use the Loan Payoff Calculator to see how extra payments may change your payoff time and interest.