A car loan payment uses the same underlying math as a mortgage, just with smaller numbers and shorter terms — which makes it a good example for seeing exactly how loan amount, rate, and term interact to produce your monthly payment.
The car loan payment formula
M = P × [r(1+r)^n] / [(1+r)^n − 1]
- M — monthly payment
- P — loan principal (vehicle price minus down payment and trade-in value)
- r — monthly interest rate (annual rate divided by 12)
- n — total number of monthly payments (loan term in years × 12)
A worked example
A $28,000 car loan at 6.9% annual interest over 60 months (5 years):
- P = 28,000
- r = 0.069 / 12 = 0.00575
- n = 60
That works out to a monthly payment of roughly $553, with total interest paid over the life of the loan around $5,180.
How term length changes the total cost
Stretching that same $28,000 loan to 72 months instead of 60 lowers the monthly payment to about $475, but raises total interest paid to roughly $6,200 — a longer term reduces the monthly burden while increasing what you pay overall, since interest has more time to accumulate.
Why your down payment matters more than it seems
Every dollar of down payment or trade-in value reduces P directly, which lowers both your monthly payment and total interest. A larger down payment can also sometimes qualify you for a better rate, since a smaller loan-to-value ratio is generally viewed as lower risk by lenders.
New car rates vs. used car rates
Interest rates for used vehicles are typically higher than for new ones, often by a percentage point or more, since used cars carry more lending risk and depreciate differently. This matters when comparing a cheaper used car against a pricier new one — the rate difference partially offsets some of the price gap.
Tip: getting pre-approved for financing before visiting a dealership gives you a real interest rate to compare against, rather than negotiating a monthly payment number that can obscure the actual rate and term being offered.
Comparing scenarios quickly
Running the formula by hand for every combination of price, down payment, rate, and term you're considering is tedious. CalcMastermind's Loan Calculator handles the calculation instantly and lets you compare different terms and down payments side by side.
The bottom line
A car loan payment follows the same amortization math as any other loan — a longer term lowers your monthly payment but raises total interest, and every dollar of down payment reduces both.