The Auto Loan Payoff Calculator is mainly intended for car purchases within the U.S. People outside the U.S. may still use the calculator, but please adjust accordingly. If only the monthly payment for any auto loan is given, use the Monthly Payments tab (reverse auto loan) to calculate the actual vehicle purchase price and other auto loan information.

Auto Loans

An auto loan is money you borrow from a lender to buy a car. You then pay this money back in fixed monthly amounts over a set period, like 3 to 5 years. Each payment covers part of the original loan amount (the principal) plus a fee for borrowing (the interest). Once you make the final payment, you own the car outright.

What is an Auto Loan?

An auto loan is money you borrow from a lender (like a bank, credit union, or the car dealership itself) to buy a vehicle.

• You don’t pay for the whole car all at once. The lender pays the car seller for you.
• You promise to pay the lender back, plus a little extra called interest.
• The car itself acts as collateral. This means if you stop making payments, the lender can take the car back.

Key Words Made Simple

When you look at a loan, you’ll see these terms. Here’s what they mean:

• Principal: This is the total amount of money you borrowed to buy the car.
• Interest: This is the extra cost you pay for the privilege of borrowing money. It’s like a rental fee for the loan. The interest rate is a percentage that determines how much extra you’ll pay.
• Term (or Loan Term): This is the length of time you have to pay back the loan. It’s usually measured in months, like 36, 48, or 60 months (which is 3, 4, or 5 years).
• Down Payment: This is the money you pay upfront, right away. It reduces the amount you need to borrow. For example, if you put $2,000 down on a $20,000 car, you only need a loan for $18,000.
• Monthly Payment: This is the set amount you pay the lender every month. It includes part of the principal and part of the interest.

How Does It Work? A Simple Example

Let’s say you want to buy a car that costs $20,000.

1. You make a down payment of $2,000.
2. You need a loan for the remaining $18,000.
3. The lender gives you the $18,000 and says, “We agree on a 4-year (48-month) loan with a 5% interest rate.”
4. You now have a monthly payment of about $414. This payment pays back a little of the $18,000 (the principal) and a little of the interest each month.
5. After 48 months of on-time payments, you fully own the car!

Before You Get a Loan: 3 Easy Steps

1. Check Your Budget: Look at your monthly income and expenses. How much can you comfortably afford for a car payment each month? Don’t forget to budget for gas, insurance, and maintenance!
2. Check Your Credit Score: Your credit score is like a grade for how you handle money. A higher score usually gets you a lower interest rate, which saves you money.
3. Get Pre-Approved: Go to your bank or credit union before you go to the dealership and ask for a pre-approval. This tells you how much money they are willing to lend you and at what interest rate. It gives you power and helps you stick to your budget.

Dealership Financing vs. Direct Lending

When you need a car loan, you have two main places to get one: Direct Lending or Dealership Financing.

• Direct Lending means you go directly to a bank or credit union yourself to get a loan. You walk into the dealership already knowing how much you can spend and what your interest rate is. This gives you control and helps you stick to your budget.
• Dealership Financing means you apply for a loan right at the car dealership. The dealer works with multiple lenders to find you a loan. This can be very convenient, and sometimes they offer special low-rate deals.

The key difference: With direct lending, you arrange the loan yourself. With dealership financing, the dealer acts as the middleman to arrange the loan for you. It’s always a smart idea to check with your own bank first, so you can compare the dealer’s offer with one you already have.

Vehicle Rebates

A vehicle rebate is a cash-back offer from the car manufacturer. Think of it as a discount you get after buying the car. It’s often used to help sell certain models faster.

• How it usually works: The manufacturer may send you a check after the purchase, or more commonly, the dealership will apply the rebate amount directly to your down payment, lowering the price of the car and the loan amount you need.

Fees

Fees are the extra charges added to the car’s price. They are separate from the loan amount but you often have to pay them as part of the total cost.

• Common fees include:
  • Documentation Fee (“Doc Fee”): Covers the cost of preparing the sales contract and paperwork.
  • Title and Registration Fee: Paid to the state to legally get your car’s license plates and title.
  • Other potential fees: Dealerships may have other charges. Always ask what each fee is for.

Auto Loan Strategies

Use these smart, step-by-step strategies to take control of the car-buying process and save thousands of dollars.

1. Check and Strengthen Your Credit First
Your credit score is the single most important factor in determining your loan’s interest rate.

• How to do it: Get a free copy of your credit report from annualcreditreport.com. Check your score through your bank, credit card app, or a free service. Scrutinize your report for any errors that could be dragging your score down, like incorrect late payments.
• Why it works: Lenders see a high credit score (typically 720+) as low risk, so they reward you with a significantly lower Annual Percentage Rate (APR). Even improving your score by 50 points can save you thousands over the life of the loan.

2. Get a Pre-Approval from Your Bank or Credit Union
A pre-approval is your secret weapon and should be your first step before visiting a dealership.

• How to do it: Apply for a loan with a local credit union (they often have the best rates) or your own bank. They will do a credit check and give you a “pre-approval letter” stating the loan amount and interest rate you qualify for.
• Why it works: This letter sets a firm baseline for a good deal. It turns you from a “monthly payment shopper” into a “cash-ready buyer.” You can then confidently ask the dealership if their financing department can beat your pre-approved rate.

3. Follow the “20/4/10” Rule for a Healthy Loan
This is a classic rule of thumb to avoid over-borrowing and ensure your loan is affordable.

• How to do it:
  • 20% Down: Make a down payment of at least 20% of the car’s price.
  • 4-Year Term: Finance the car for no longer than 4 years (48 months).
  • 10% of Income: Your total monthly auto costs (loan payment, insurance, gas, maintenance) should not exceed 10% of your gross monthly income.
• Why it works: This strategy prevents you from being “upside-down” (owing more than the car is worth), minimizes interest paid, and ensures the car payment doesn’t strain your overall budget.

4. Negotiate the “Out-the-Door” Price, Not the Monthly Payment
This is the most critical negotiating tactic. Dealers can manipulate a monthly payment to hide a high car price.

• How to do it: Before you even mention a trade-in or financing, negotiate and agree on the final total price of the vehicle, including all taxes and fees. This is the “out-the-door” price.
• Why it works: It keeps the focus on the actual cost of the car. If you only talk about monthly payments, a salesperson might extend your loan term to 6 or 7 years to make the payment seem low, while you end up paying far more in interest.

5. Understand How Rebates and Incentives Interact with Your Loan
Manufacturer rebates can be a great discount, but know how they work with different loan types.

• How to do it: If you have a low pre-approved interest rate (e.g., 3%), compare it to a special dealership offer like “0% APR OR $2,500 Cash Back.” Often, taking the cash rebate and using your higher-interest loan is a better financial deal. Do the math for your specific situation.
• Why it works: The “0% financing” offers are usually only for buyers with excellent credit, and you give up the large rebate to get it. Frequently, taking the cash and paying a small amount of interest leaves more money in your pocket.

6. Have a Plan for Your Trade-In
The value of your current car is a powerful tool, but it should be handled separately.

• How to do it:
  • Step 1: Know your car’s value by checking websites like Kelley Blue Book (KBB) or Edmunds.
  • Step 2: Get a written offer from a different dealership or a car-buying service (like CarMax) before you go to buy your new car.
  • Step 3: Only after you’ve settled on the “out-the-door” price for the new car, tell the dealer you have a trade-in and show them your competing offer.
• Why it works: This prevents the dealer from giving you a seemingly good deal on the new car while low-balling you on your trade-in. By separating the negotiations, you ensure you get fair market value for your old vehicle.

Buying a Car with Cash Instead

Using cash to buy a car means paying the full price upfront with money you have saved, without taking out a loan. It’s a straightforward transaction that changes your relationship with car buying.

The Biggest Advantages of Paying Cash

• You Own It Immediately: The car is 100% yours from day one. There’s no bank with a financial claim on it, and you receive the title outright.
• Zero Debt and Interest: You avoid years of monthly payments and the extra cost of interest. This can save you thousands of dollars over the life of a loan.
• Stronger Negotiating Power: Sellers, especially private sellers, often prefer a cash offer. It’s a guaranteed, hassle-free sale with no waiting for loan approvals. You can use this to potentially negotiate a lower price.
• Simpler and Faster Process: The purchase process is much quicker. There’s no loan application, no credit check, and far less paperwork.
• Forces You to Budget Realistically: Paying with cash forces you to live within your means. You can only buy a car you can truly afford, which prevents you from overspending.

Important Things to Consider

• Your Savings Take a Hit: A large cash payment will significantly reduce your savings. It’s crucial to ensure you still have a solid emergency fund for other life expenses after the purchase.
• A Possible “Opportunity Cost”: The money you use for the car could potentially have been invested elsewhere (like in the stock market or a retirement account) where it might have earned a return. If a car loan’s interest rate is very low, it could sometimes make more financial sense to finance and invest your cash.
• Might Limit Your Car Choice: Your budget is fixed to the cash you have on hand. You might not be able to afford a more expensive, newer model that a loan could technically access.

Who is this best for?
Paying cash is an excellent strategy if you have robust savings, want to avoid debt, and are looking for a simple, cost-effective way to own a reliable vehicle.

The Bottom Line:
Buying a car with cash is a powerful financial move that gives you freedom and peace of mind. While it requires discipline to save, it eliminates long-term debt and keeps more of your money in your pocket.

Trade-in Value

Your trade-in value is the amount of money a car dealership offers you for your current vehicle, which is then applied toward the purchase price of your new car. It’s like using your old car as a form of payment.

How is the Value Determined?
Dealers base their offer on your car’s:

• Make, Model, and Year: Some brands and models simply hold their value better than others.
• Condition: This includes mechanical soundness, interior and exterior wear and tear, and any needed repairs.
• Mileage: Lower mileage typically means a higher value.
• Market Demand: What are similar cars selling for in your area right now?

The Key Strategy: Know Your Car’s Worth Before You Go
The most important step is to get an independent valuation of your vehicle before you negotiate with a dealer.

1. Research Online: Use trusted sources like Kelley Blue Book (KBB) or Edmunds to get an instant cash-offer or see the typical trade-in range for your car’s specifics.
2. Get a Competing Offer: Take your car to a place like CarMax for a free, no-obligation appraisal. This gives you a firm, written number to use as leverage.

The Golden Rule of Negotiating
Always negotiate the price of the new car first, separately from discussing your trade-in. Once you have a final, agreed-upon “out-the-door” price for the new vehicle, then present your trade-in and the competing offer you have.

Why This Matters:
This prevents a dealer from giving you a seemingly good price on the new car while offering you far less for your trade-in. By keeping the transactions separate, you ensure you get the true, fair market value for your current vehicle.

Frequently Asked Questions (FAQs)

Q1: What credit score do I need to get a car loan?
A: There’s no single magic number, but generally:

• Excellent (720+): Gets you the best (lowest) interest rates.
• Good (660-719): Will likely qualify for a loan with a decent rate.
• Fair (620-659): You can still get a loan, but the interest rate will be higher.
• Below 620: It becomes more difficult and expensive. You may need a larger down payment.

Q2: Is it better to get a loan from my bank or the dealership?
A: It’s best to check both!

• Your Bank/Credit Union: Often offers lower interest rates if you have good credit. Getting pre-approved here first gives you a strong offer to compare against.
• The Dealership: Can sometimes find special promotions or rates from multiple lenders. Use your pre-approval from the bank to see if the dealer can beat it.

Q3: How much of a down payment do I really need?
A: While zero-down offers exist, they are often a bad idea. Aim for at least 10-20% of the car’s price. A larger down payment means you borrow less, have lower monthly payments, and avoid owing more on the car than it’s worth (being “upside-down”).

Q4: How long should my car loan term be?
A: Choose the shortest term you can comfortably afford. A 36 or 48-month loan will save you a lot of money on interest compared to a 72 or 84-month loan. While the monthly payment is higher with a short term, you’ll own the car faster and pay less overall.

Q5: What does it mean to be “upside-down” on a car loan?
A: This is also called “negative equity.” It means you owe more money on your loan than the car is currently worth. This can happen with a long loan term or a small down payment. It makes it difficult to sell or trade-in the car without bringing extra cash to the deal.

Q6: Can I get a car loan if I’m self-employed or have a new job?
A: Yes, but it can be trickier. Lenders want to see stable income. You may need to provide additional paperwork, like bank statements, tax returns from the last two years, or proof of contracts to show you have a reliable income.

Q7: What is pre-approval, and why is it important?
A: Pre-approval is when a lender checks your credit and tells you how much they are willing to lend you and at what interest rate before you shop. It’s important because it:

• Sets your budget.
• Makes you a more serious buyer.
• Gives you a bargaining tool at the dealership.

Q8: What should I do if my credit is bad and I need a car?
A:

• Save for a larger down payment to borrow less money.
• Consider a co-signer with good credit (but understand they are legally responsible if you can’t pay).
• Look for a less expensive, reliable used car to lower the loan amount.
• Once you have the car, make all payments on time to improve your credit, and consider refinancing the loan for a better rate in a year or two.