APR and Car Loan Terms Explained, With the Math

Three numbers decide what a car loan costs: the amount you finance, the APR, and the term. The monthly payment is just the result. If you compare loans by APR at the same term, and keep the term as short as you can comfortably afford, you have done most of the work.

APR vs. interest rate

Interest rate: the cost you pay the lender for borrowing the money.
APR (annual percentage rate): the interest rate plus any additional fees charged by the lender, expressed as a yearly percentage.

That is how the Consumer Financial Protection Bureau (CFPB) defines them. Because the APR folds in lender fees, it is the better number for comparing one loan against another. On many car loans the two are identical or close, because there are few lender fees. When the APR is noticeably higher than the quoted rate, ask which fees account for the gap.

Lenders are required by the federal Truth in Lending Act to disclose the APR in writing before you are obligated on the loan, along with three related figures:

Disclosure	What it tells you
APR	The cost of credit as a yearly rate
Finance charge	The cost of credit in dollars over the whole loan, if you make every payment on time
Amount financed	The amount of credit provided to you
Total of payments	Everything you will have paid by the end: amount financed plus finance charge

These appear in a box near the top of a dealer's retail installment contract. Our guide to reading a buyer's order shows where.

What the term does to the total

A longer term spreads the same debt over more months. Each payment is smaller, but you pay interest for longer, so the total goes up.

Example only. A $30,000 loan at 7% APR, with fixed monthly payments. Your rate will differ; the pattern will not.

Term	Monthly payment	Total interest	Total of payments
36 months	$926	$3,347	$33,347
48 months	$718	$4,483	$34,483
60 months	$594	$5,642	$35,642
72 months	$511	$6,826	$36,826
84 months	$453	$8,034	$38,034

Figures are rounded to the nearest dollar. Going from 48 to 72 months lowers the payment by about $207 a month and adds about $2,343 in interest. Going from 36 to 84 months more than doubles the interest.

In practice the gap is often wider than this table shows, because lenders commonly charge a higher APR for longer terms. Ask for the rate at each term you are considering.

The CFPB's own sample makes the same point with a $20,000 loan at 4.75%: $1,498 of interest over three years versus $3,024 over six.

You can run your own numbers in the payment calculator.

The other cost of a long loan: negative equity

Cars lose value fastest early on, and a long loan pays down principal slowly. That combination means you can owe more than the car is worth for years. The CFPB notes that longer loans are more likely to leave you in that position, and that some financial experts recommend keeping an auto loan to five years or less.

Being "upside down" matters if the car is totaled or stolen, or if you need to sell or trade it early. See negative equity and depreciation explained.

When a longer term can be reasonable

The APR is very low (for example a manufacturer's promotional rate), so the extra months cost little.
You plan to keep the car well past the end of the loan.
You have a solid down payment, so you are not upside down.
The alternative is a payment that strains your budget and risks a missed payment.

If the only way to afford the car is 84 months, that is useful information about the car, not about the loan. A less expensive vehicle is usually the better fix. See how much car you can afford.

Simple interest vs. precomputed interest

How interest is calculated matters if you ever pay ahead of schedule.

	Simple interest	Precomputed interest
How it works	Interest is calculated on the outstanding balance	Total interest is calculated up front and spread across the payments
How common	Far more common, per the CFPB	Uncommon, per the CFPB
Extra payments	Reduce principal, which lowers future interest	Do not reduce what you owe in the same way
Early payoff	You stop paying interest from that point	You may get a partial refund of "unearned" interest, but you generally pay more than with simple interest

If you plan to pay the loan off early, the CFPB advises making sure the lender uses simple interest.

Two practical notes on simple-interest loans:

Interest accrues on the balance over time, so paying late means more of that payment goes to interest and less to principal.
When you pay extra, tell the lender to apply it to principal. Some servicers otherwise treat it as an early payment of next month's bill.

Questions to ask about any loan offer

Copy these into your notes and get answers in writing:

What is the APR, and what is the term in months?
What is the amount financed, and what exactly is included in it? (Price, tax, fees, and any optional products.)
What is the total of payments?
Is this a simple-interest loan?
Is there a prepayment penalty?
Is the rate fixed?
What would the APR be at a 12-month shorter term?

Whether a loan may carry a prepayment penalty depends on your contract and your state's law, so read that line rather than assuming.

How to compare two offers

The CFPB recommends looking at the APR, the loan length, and the total amount financed rather than the monthly payment alone. A simple routine:

Line the offers up at the same term and same amount financed. The lower APR wins.
If the terms differ, compare the total of payments.
Check that a "better" offer did not quietly change something else. A lower monthly payment can come from a longer term rather than a lower rate, and a lower rate can come with added products in the amount financed.

To have a real offer in hand before you shop, get pre-approved. To see how the loan source affects the rate, read dealer financing vs. bank vs. credit union. And if you want to shrink the amount financed itself, see how much to put down.