 # How Much Interest Will I Pay on My Car Loan?

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## Introduction

You’ve finally saved up enough money for a down payment on a new car, and you’re ready to start shopping for your dream ride. Before you start signing loan papers, it’s important to know how much interest you can expect to pay. Interest is the cost of borrowing money, and it’s calculated as a percentage of your loan amount. The higher the interest rate, the more you’ll pay in interest over the life of the loan.

The average interest rate for a new car loan is around 4%, but it can vary based on factors like your credit score, the type of car you’re buying, and the length of the loan. In general, loans with shorter terms will have lower interest rates than loans with longer terms.

To get an idea of how much interest you might pay on your car loan, use our calculator below. Simply enter the loan amount, term, and interest rate to see how much you’d pay in total. Remember to factor in other costs like taxes and fees when budgeting for your new car.

## How is interest calculated on a car loan?

The amount of interest you pay on a car loan is determined by a few different factors. These include the loan amount, the interest rate, the term of the loan, and whether the loan is simple interest or compound interest. In this article, we’ll take a closer look at how each of these factors affects the amount of interest you’ll pay on your car loan.

### Simple interest

Simple interest is calculated as a percentage of the principal, and it’s paid in addition to the principal. So, if you have a \$1,000 loan with 10% simple interest, you’ll owe \$1,100 at the end of the loan – \$1,000 for the principal, and \$100 in interest.

### Precomputed interest

Precomputed interest is interest that is calculated by the lender at the time the loan is originated and added to the principal balance of the loan. This means that the interest you pay is “front-loaded” and you will pay more interest in the early years of the loan than in the later years. For example, if you borrow \$20,000 at 10% APR for 60 months, your monthly payments will be \$377, and you will pay a total of \$22,660 in interest over the life of the loan. If you borrowed that same amount at 6% APR for 60 months, your monthly payments would be \$371, and you would pay a total of \$16,620 in interest over the life of the loan—a difference of \$6,040.

## How much interest will I pay on my car loan?

If you’re wondering how much interest you’ll pay on your car loan, the answer depends on several factors. These include the loan term, the interest rate, and the amount of money you borrow. In this article, we’ll give you an example of how much interest you might pay on a car loan.

### Example 1: Simple interest

If you borrow \$10,000 from a lender at a 10% annual interest rate, and you don’t make any payments for two years, you’ll owe the lender \$12,000 at the end of those two years. The \$10,000 is the principal amount you borrowed. The \$2,000 is the total amount of interest that accumulated during the two years.

Here’s how that breaks down on a per-year basis:

Year 1: You’ll owe \$1,000 in interest (\$10,000 x 0.10 = \$1,000).

Year 2: You’ll owe an additional \$1,000 in interest (\$11,000 x 0.10 = \$1,100). The total amount of interest you’ll pay by the end of Year 2 will be \$2,000 (\$1,000 + \$1,100).

### Example 2: Precomputed interest

If your loan agreement states that interest is “precomputed,” this means that your lender calculated the interest owed on your loan in advance and included it in the principal balance of your loan.

This is different from “simple interest,” where interest accrues on the outstanding principal balance of your loan throughout the life of the loan and is added to your monthly payment.

With precomputed interest, you’ll pay more interest overall because you’re paying interest on the full amount of the loan from day one. But, because all of the interest is included in each monthly payment, your payment will stay the same throughout the life of the loan.

Let’s say you take out a \$10,000 car loan with a 4% precomputed annual percentage rate (APR) for three years (36 months). Your monthly payments would be \$290.44 and you would pay a total of \$10,361.04 in interest over the life of the loan.

## Conclusion

Many factors will affect the amount of interest you pay on your car loan, including the length of the loan, the interest rate, and the type of financing you choose. You can use this calculator to estimate your total interest payments. Remember, this is only an estimate – your actual interest payments may be higher or lower.