A car loan is a secured installment loan where you borrow a fixed amount and repay it with interest over a set term. The monthly payment is calculated through amortization — the same payment each month, but the split between principal and interest changes over time. In 2026, average new car loan APRs are around 7.1%; used car loans average 11.3%. The best rates come from credit unions, not dealers.
How Monthly Car Payments Are Calculated
The monthly payment formula:
$$P = \frac{L \cdot r}{1 - (1 + r)^{-n}}$$
Where:
- $L$ = loan amount
- $r$ = monthly interest rate (APR ÷ 12)
- $n$ = number of months
Example: $30,000 loan, 7% APR, 60 months:
- $r$ = 0.07 ÷ 12 = 0.00583
- Monthly payment = $594/month
- Total paid = $35,641
- Total interest = $5,641
Total Interest Cost by Loan Term (7% APR, $30,000 Loan)
| Loan Term | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 36 months | $926 | $3,338 | $33,338 |
| 48 months | $718 | $4,440 | $34,440 |
| 60 months | $594 | $5,641 | $35,641 |
| 72 months | $513 | $7,258 | $37,258 |
| 84 months | $455 | $9,108 | $39,108 |
Choosing a 72-month over a 60-month term costs $1,617 more in interest. Choosing 84 months costs $3,467 more — for the same vehicle.
What Affects Your Auto Loan APR
| Factor | Impact |
|---|---|
| Credit score | Biggest factor — 100+ point difference can mean 4–6% APR difference |
| Loan term | Longer terms often carry slightly higher rates |
| New vs. used | Used car loans average 3–5% higher APR than new car loans |
| Down payment | Larger down payment slightly reduces rate risk for lender |
| Lender type | Credit unions: lowest; Banks: moderate; Dealer F&I: often highest |
| Vehicle age | Vehicles older than 7–10 years may not qualify for standard rates |
Auto Loan APR Rates by Credit Score (2026 Averages)
| Credit Score | New Car APR | Used Car APR |
|---|---|---|
| 720–850 (Excellent) | 5.1–6.5% | 7.0–9.0% |
| 690–719 (Good) | 6.5–8.0% | 9.0–11.5% |
| 660–689 (Fair) | 8.0–11.0% | 11.5–14.5% |
| 620–659 (Poor) | 11.0–15.5% | 14.5–18.0% |
| Below 620 (Very Poor) | 15.5–25%+ | 18–25%+ |
Check Experian, Equifax, or TransUnion for your current score before applying.
Where to Get a Car Loan (Best to Worst Rate, Typically)
- Credit unions — consistently lowest rates; membership often easy to obtain
- Your personal bank — competitive if you have an existing relationship
- Online lenders (LightStream, PenFed, Capital One Auto) — fast, competitive
- Dealer financing via captive lender (Toyota Financial, Honda Financial, etc.) — sometimes competitive, especially with 0% promotions on new vehicles
- Dealer F&I with third-party lender — typically highest rate; dealers mark up from wholesale
How Dealer Financing Markup Works
Dealers receive a wholesale interest rate from lenders and can mark it up by up to 2% (capped by CFPB guidance, though enforcement varies). On a $35,000 loan at 60 months:
- Wholesale rate: 6.5% → your payment: $683/month
- Dealer marks up to 8.5% → your payment: $720/month
- Extra dealer profit: $37/month × 60 = $2,220
Getting pre-approved from your credit union or bank eliminates this markup risk. You walk in with your own financing and simply compare it to whatever the dealer offers.
See Car Lease vs. Buy if you’re considering leasing instead of financing.
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