What Does Your Car Really Cost? Calculating Total Loan Cost

total loan cost

When you finance a car, the total amount you pay over the life of the loan includes more than just the vehicle's price. It includes the principal (the amount you borrow), the interest charged over the loan term, and any taxes and fees that are included in the loan.

The principal is the starting balance of your loan, which can include the negotiated vehicle price plus add-ons like warranties, and it can also include taxes and fees if you roll them into the loan. Interest is what the lender charges you for borrowing that money, and fees can include documentation, title, registration, and other charges.

• Principal: the amount borrowed to buy the car, plus any taxes, fees, or add-ons you finance.
• Interest: the cost of borrowing, determined by the interest rate and the length of the loan.
• Taxes and fees: sales tax, title, registration, and dealer fees that can be added to the loan balance.
• APR: a broader measure of the cost of borrowing that includes the interest rate and certain fees.

Sources: Consumer Financial Protection Bureau

How to Calculate Total Interest

Calculating total interest on a car loan requires knowing the loan amount, the annual percentage rate (APR), and the loan term. One common method is to use the amortization formula: P = [r * L] / [1 - (1 + r)^-n], where P is the monthly payment, L is the loan principal, r is the monthly interest rate (APR divided by 12), and n is the number of monthly payments.

To find the total interest, you multiply the monthly payment by the number of payments and subtract the principal. For example, if your monthly payment is $500 for 60 months, you pay $30,000 total. If the principal is $25,000, the total interest is $5,000. This figure is the core of understanding what the loan costs you.

Sources: Certified AutoBrokers Inc.

Example: Total Cost on a $25,000 Loan

To illustrate how total cost varies, consider a $20,000 loan at 4.75% APR. According to the Consumer Financial Protection Bureau, a 3-year term results in total interest of approximately $1,498, while a 6-year term results in approximately $3,024 in total interest. The same principle applies to a $25,000 loan: the longer the term, the more interest you pay overall.

For a $25,000 loan at 4.75% APR, the monthly payment and total interest would scale proportionally. For instance, at 5 years, you might pay around $469 per month, totaling $28,140, which includes $3,140 in interest. But the key is that the longer the term, the lower the monthly payment, yet the higher the total interest paid.

Sources: Consumer Financial Protection Bureau

loan term on total cost

The length of your loan term significantly affects both your monthly payment and the total interest you pay. A shorter loan term means you make fewer payments, so you pay less interest overall, but the monthly payment is higher. Conversely, a longer loan term reduces the monthly payment but increases the total interest because interest accrues over a longer period.

For example, on a $20,000 loan at 4.75% APR, a 36-month term totals about $21,498 (principal plus $1,498 interest), while a 72-month term totals about $23,024 (principal plus $3,024 interest). This illustrates that choosing a longer term to lower your monthly payment can add thousands of dollars to the total cost.

• Shorter term: higher monthly payment, lower total interest.
• Longer term: lower monthly payment, higher total interest.
• Before choosing a term, compare the total cost, not just the monthly payment.

Sources: Consumer Financial Protection Bureau

Fees and Taxes That Add Up

In addition to interest, taxes and fees contribute to the total cost. These include sales tax, documentation fees, title and registration charges, and options like extended warranties. You may be able to roll these into the loan amount, which means you'll pay interest on them over the life of the loan, increasing the total cost.

Some fees, like sales tax and government registration costs, are set by government and are not negotiable. Dealer fees, however, may be negotiable. If you finance these fees, you'll pay interest on them, so it's wise to consider paying them upfront if possible, or at least factor them into your total cost comparison.

• Sales tax, title, and registration are typically set by government and vary by location.
• Dealer documentation and other fees can be negotiated.
• Optional add-ons like extended warranties add to the loan balance and thus to the interest paid.

Sources: Consumer Financial Protection Bureau, Certified AutoBrokers Inc.

Comparing total costs

To find the best deal, compare the total cost of each loan offer, not just the monthly payment. The Consumer Financial Protection Bureau advises looking at the APR, interest rate, length of the loan, total amount financed, and the total cost, which includes interest and fees. A lower monthly payment might come with a longer term or a higher APR, ultimately costing you more over time.

When comparing offers, ask each lender for a loan estimate that shows the total cost, including all fees and interest. Use this information to compare apples to apples. Even a small difference in APR can add hundreds of dollars to your total cost. For example, a 1% higher rate on a $28,000 loan over 60 months adds more than $800 in total interest.

• Compare APRs, not just interest rates, because APR includes fees.
• Look at the total amount financed, including taxes and fees.
• Consider the length of the loan and its effect on total cost.
• Get loan offers from multiple lenders before deciding.

Sources: Consumer Financial Protection Bureau, Certified AutoBrokers Inc.