Overhaulin' - How is a car loan interest calculated?

How is a car loan interest calculated?

I am looking at getting a new car, out the door the total is $18,925. It would be 5.25% interest on a loan, and I was looking at doing 72 months. When I do the math I get a total of 19,918 and over 72 months the payment comes to $276. However, the dealership said it would be $305 a month over 72 months. When you multiply that out it comes to $21,960, can someone please explain the $2,000 difference, and how interest is calculated?

Public Comments

http://www.amortization-calc.com/ http://en.wikipedia.org/wiki/Amortization_calculator
what happens is you end up paying very little towards the principle, the longer the loan the more interest you pay and you end up paying interest on interest I had about a 16000 loan over 65 mo w/ 6% interest and my monthly payment is 305. Its not just a simple compound interest equation.... there are many car loan calculators on the web if you search and they may give you a better look at the math.
It is not easy to do by hand. I used to know how but I can not remember. You are overly simplifying it. If I loan is over 1 year you can not just take the amount x (1 +rate) and divide by the number of months. In Excel, the formula is: PMT(rate,nper,pv,fv,type) In your case PMT=((.0525/12),72,18925,1) or $305.65 The dealer is correct.
The dealership is correct. (I actually got 306.99 per month, but close enough.) The difference is due to the time value of money. The longer you borrow the money, the more interest you pay. If you were just giving them 5.25% on top of the cost of the car on the day you bought it, then you would be correct and the total would be 19,918. But the dealership is going to charge you interest each and every month that you've got a loan outstanding. For example, borrowing for 72 months means your total is 21,960. If you borrowed for 60 months, your payments would be higher at 359.31, but your total would be lower -- only 21,559. You save about $400 by paying the car off a year sooner, because the dealership wasn't charging you to borrow that money for an extra year. There are formulas you can use to calculate an actual payment under these terms. Post a question if you're interested and I (or someone else) will certainly provide one.
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