How does interest work on a car loan?

How do you calculate interest on a car loan? I've been doing some research to try to figure out what kinds of cars I can afford, but loans are confusing. I'm not really sure how car loan interest works when you finance a car.

Answer
Interest on a car loan is an annualized percentage (it grows every year) that determines how much money you pay on top of the principal (the lump sum).
Similar to a mortgage, interest on an auto loan usually goes through an amortization schedule, which means you’ll pay more interest at the beginning of your loan term. As you pay off the loan, the amount of money going toward interest decreases, and the amount going to the principal increases.
Typically, long-term loans will have higher interest rates than short-term loans. For example, a 60-month loan might have an interest rate of 3%, while an 84-month loan could have an interest rate of 5.5%.
However, neither loan is necessarily better than the other. While they tend to have lower interest rates, short-term loans mean higher monthly payments that tie up your money until the loan is paid off. Alternatively, long-term loans have lower monthly payments despite higher interest rates.
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Eric Schad
Answered on Sep 09, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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