To calculate interest on a car loan, multiply the remaining balance by the APR divided by 12. That is one month's interest; the rest of the payment reduces the balance. A $30,000 loan at 7.54% APR accrues 30,000 × 0.0754 ÷ 12 = $188.50 in the first month. Over 60 months of $601.71 payments, total interest comes to $6,102.53.
Most car loans are simple interest loans that are paid off in equal monthly installments, a process called amortization. Because interest is charged only on what is still owed, the interest part of each payment shrinks every month while the principal part grows.
What is the formula for car loan interest?
Three formulas cover almost every question about an installment car loan:
Monthly interest = B × r
Monthly payment M = P × r ÷ (1 − (1 + r)^−n)
Total interest = M × n − P
- P is the amount financed (price minus down payment and trade-in, plus any taxes and fees rolled into the loan).
- r is the monthly rate: the APR as a decimal divided by 12. 7.54% becomes 0.0754 ÷ 12 = 0.006283.
- n is the number of monthly payments (60 for a five-year loan).
- B is the balance still owed at the start of the month.
The CFPB explains that simple interest, "far more common" on auto loans, is calculated on the outstanding balance "either on a daily or monthly basis." The monthly version above is what lenders use to set the payment; a lender that accrues daily charges B × APR ÷ 365 for each day between payments, which comes out almost the same when payments arrive on schedule.
How do you calculate it step by step?
Step 1: Work out the monthly payment
$30,000 at 7.54% for 60 months:
- r = 0.0754 ÷ 12 = 0.0062833
- (1 + r)^−60 = 0.68673
- M = 30,000 × 0.0062833 ÷ (1 − 0.68673) = $601.71
Step 2: Split the first payment into interest and principal
- Interest: 30,000 × 0.0062833 = $188.50
- Principal: 601.71 − 188.50 = $413.21
- New balance: 30,000 − 413.21 = $29,586.79
Step 3: Repeat with the new balance
Month 2 interest is 29,586.79 × 0.0062833 = $185.90, so $415.81 goes to principal. Repeating this for all 60 months produces the amortization schedule.
Step 4: Total interest
601.71 × 60 − 30,000 = $6,102.53 (the exact figure, from the unrounded payment).
How much interest is paid each year?
Interest is front-loaded: the CFPB notes that early in a loan more of each payment goes to interest. The $30,000, 60-month loan at 7.54% with the first payment in January 2026:
| Year | Payments | Interest paid | Share of total interest |
|---|---|---|---|
| 2026 | 12 | $2,087.00 | 34% |
| 2027 | 12 | $1,686.28 | 28% |
| 2028 | 12 | $1,254.27 | 21% |
| 2029 | 12 | $788.54 | 13% |
| 2030 | 12 | $286.45 | 5% |
| Total | 60 | $6,102.53 | 100% |
After the first year, $24,866.50 is still owed: $5,133.50 of principal has been repaid out of $7,220.51 paid.
How do the loan term and amount change the interest?
Total interest at 7.54% APR (the Federal Reserve's August 2026 average for 60-month new-car loans at commercial banks), monthly payment first:
| Amount financed | 36 months | 48 months | 60 months | 72 months | 84 months |
|---|---|---|---|---|---|
| $20,000 | $622.49 / $2,409.71 | $483.95 / $3,229.67 | $401.14 / $4,068.35 | $346.19 / $4,925.66 | $307.16 / $5,801.48 |
| $30,000 | $933.74 / $3,614.56 | $725.93 / $4,844.51 | $601.71 / $6,102.53 | $519.28 / $7,388.49 | $460.74 / $8,702.22 |
| $40,000 | $1,244.98 / $4,819.41 | $967.90 / $6,459.34 | $802.28 / $8,136.71 | $692.38 / $9,851.33 | $614.32 / $11,602.96 |
Stretching a $30,000 loan from 60 to 84 months lowers the payment by about $141 but adds $2,599.69 of interest, and longer loans often carry higher rates than shown here. The CFPB makes the same point: a longer term lowers the monthly payment but raises the total interest paid. For reference, finance companies' new-car loans averaged 67 months and $41,705 financed in the second quarter of 2026 (G.19).
How much does the interest rate matter?
A $40,000 loan over 60 months at different APRs:
| APR | Monthly payment | Total interest |
|---|---|---|
| 2.99% | $718.57 | $3,114.19 |
| 5% | $754.85 | $5,290.96 |
| 7.54% | $802.28 | $8,136.71 |
| 10% | $849.88 | $10,992.91 |
| 14% | $930.73 | $15,843.80 |
Each percentage point on a $40,000 five-year loan is worth roughly $1,080 to $1,210 of interest. Comparing the APR from a bank or credit union with the dealer's offer before signing is where most of the savings are.
How does daily interest work on a car loan?
On a daily simple interest loan, the lender charges B × APR ÷ 365 for each day. On a $30,000 balance at 7.54% that is 30,000 × 0.0754 ÷ 365 = $6.20 a day. Two consequences:
- Paying late costs interest, not just a late fee. A payment that arrives 10 days late leaves the higher balance in place for 10 more days, about $62 of extra interest at the start of the loan.
- Paying early or extra saves interest. Any amount above the payment goes to principal, and every later day's interest is charged on the lower balance.
Simple interest vs precomputed interest
With precomputed interest, the total interest for the whole term is calculated at signing and added to the loan. The CFPB calls this "uncommon" and warns that extra payments then "do not reduce the principal amount (or interest) owed." Some precomputed loans use the Rule of 78s to decide how much interest is refunded on early payoff, which favors the lender. Anyone planning to pay a loan off early should confirm in the contract that it uses simple interest.
Can car loan interest be deducted?
For tax years 2025 through 2028, the IRS allows a deduction of up to $10,000 a year of interest on a loan for a new vehicle bought for personal use, if the vehicle had its final assembly in the United States and the loan was taken out after December 31, 2024. It is available whether or not the taxpayer itemizes and is claimed on Schedule 1-A. It phases out by $200 for each $1,000 (or part of $1,000) of modified adjusted gross income above $100,000, or $200,000 for joint filers. Used cars and leases do not qualify.
Example: the $30,000 loan above, first payment January 2026, single filer:
- 2026 interest: $2,087.00, under the $10,000 cap.
- MAGI $90,000: full deduction of $2,087.00. In the 22% bracket that saves 2,087 × 0.22 = $459.14 of federal income tax.
- MAGI $105,000: $5,000 over the threshold = 5 steps × $200 = $1,000 reduction, so the deduction is $1,087.00.
- Across 2026–2028 at MAGI $90,000 and a 22% marginal tax rate, the deduction saves $1,106.06; the 2029 and 2030 interest is not deductible because the provision ends after 2028.
Common mistakes when calculating car loan interest
- Using the annual rate as the monthly rate. 7.54% a year is 0.628% a month, not 7.54%.
- Multiplying the original amount by the rate and the years. 30,000 × 0.0754 × 5 = $11,310 overstates interest by almost double, because the balance falls every month.
- Ignoring what is rolled into the loan. Taxes, fees, add-ons and negative equity from a trade-in all increase P and the interest charged on it.
- Comparing payments instead of total cost. A lower payment from a longer term usually means more interest, as the term table shows.
Credit card balances use the same idea with a daily rate instead of a fixed schedule; see how credit card interest is calculated. Before taking on a new payment, the debt-to-income ratio guide shows how lenders judge whether it fits.
This guide is educational and not financial advice; the loan contract and IRS instructions control the actual interest and any deduction.