Financial education
How Car Loan Interest Adds Up
Vehicle financing combines principal, interest, term, and sometimes additional financed costs.
How the math works
Car loans amortize the same way mortgages do, but over a much shorter term, so a higher rate has less time to compound — which is why even a 'bad' auto rate feels smaller in dollars than a mortgage rate.
Worked example
A $28,000 car loan at 7.5% over 5 years costs about $5,646 in total interest. Stretching the same loan to 7 years drops the payment by roughly $90/month but adds close to $2,600 more interest overall.
What to watch for
- Longer terms lower the payment but increase total interest and the risk of being 'upside down' on the loan
- Dealer financing rates can differ from a pre-approved bank or credit union rate — always compare both
- Add-ons (extended warranties, GAP insurance) rolled into the loan also accrue interest
Practical takeaway
Before signing, compare the total interest across two or three term lengths, not just the monthly payment you're offered.