Car loans use simple-interest amortisation: each monthly payment covers interest first, then reduces the principal. Because interest is calculated on the outstanding balance, early payments are interest-heavy and late payments are mostly principal. On a typical 60-month loan at 6.9% APR, roughly 55–60% of your total interest is paid in the first half of the term. Understanding this is the key to knowing when overpaying saves the most.
Amortisation snapshot — $30,000 loan, 60 months, 6.9% APR
| Month | Payment | Interest portion | Principal portion | Remaining balance |
|---|---|---|---|---|
| 1 | $594 | $173 | $421 | $29,579 |
| 12 | $594 | $159 | $435 | $25,200 |
| 24 | $594 | $138 | $456 | $19,800 |
| 36 | $594 | $115 | $479 | $14,100 |
| 48 | $594 | $89 | $505 | $8,000 |
| 60 (final) | $594 | $3 | $591 | $0 |
What amortisation means for a car loan
Amortisation is the process of spreading loan repayments over time so each fixed payment covers both the interest owed and a slice of the principal. Auto loans in the US (and most markets) use simple interest amortisation: the lender calculates interest on whatever balance remains at the start of each period, applies your payment to clear that interest first, then credits the remainder against the principal.
The practical result is front-loading: in the early months, most of your payment is interest. As the balance falls, less interest accrues and more of each identical payment chips away at principal.
How the interest portion is calculated each month
The formula is straightforward: Monthly interest = outstanding balance × (annual rate ÷ 12). On a $30,000 loan at 6.9% APR: month-one interest = $30,000 × (0.069 ÷ 12) = $172.50. The fixed monthly payment on a 60-month term at that rate is about $594, so $421 goes to principal, leaving a balance of $29,579. Next month the interest is calculated on that lower figure, and so on — a slow but accelerating shift toward principal.
The monthly payment formula
Payment = P × [r(1+r)^n] ÷ [(1+r)^n − 1], where P = principal, r = monthly rate (APR ÷ 12), n = number of payments. Any online amortisation calculator will generate a full schedule instantly — worth doing before you sign.
Why early overpayments matter most
Because interest is calculated on the remaining balance, any extra payment made early reduces the principal the lender uses for every future interest calculation. An extra $100 in month 3 saves more total interest than the same $100 in month 40. If your loan has no prepayment penalty (most US auto loans do not), even modest overpayments early on can shorten the loan and cut total interest meaningfully.
On the $30,000 / 60-month / 6.9% example above, adding just $50 extra per month from the start saves roughly $350 in total interest and pays off the loan about 3 months early. The saving is disproportionately large relative to the extra outlay because of how early principal reduction compounds.
Longer terms, more interest — the hidden cost
The same $30,000 at 6.9% APR illustrates how term length multiplies total interest paid:
| Term | Monthly payment | Total paid | Total interest |
|---|---|---|---|
| 36 months | $927 | $33,372 | $3,372 |
| 48 months | $714 | $34,272 | $4,272 |
| 60 months | $594 | $35,640 | $5,640 |
| 72 months | $517 | $37,224 | $7,224 |
| 84 months | $463 | $38,892 | $8,892 |
The 84-month loan looks affordable at $463/month but costs $5,520 more in interest than the 60-month option on the same amount. Longer terms also increase the risk of negative equity during the period when depreciation outpaces principal paydown.
Amortisation and negative equity
New cars depreciate sharply — often 15–25% in the first year — while amortisation schedules pay down the balance more slowly. This gap creates a period, typically the first 12–24 months on longer loans, where the loan balance exceeds the car's market value. Knowing where you are on your amortisation schedule helps you time refinancing, trade-ins or payoffs to avoid crystallising a negative-equity loss.
UK and India note
UK personal contract purchase (PCP) and hire purchase (HP) also use amortisation, though PCP includes a guaranteed minimum future value (GMFV) balloon that defers a large chunk of principal. In India, equated monthly instalment (EMI) loans follow the same amortising logic with rates typically ranging from 8.5–14% depending on lender and credit profile.
Frequently asked questions
What is an amortisation schedule?
Can I pay off a car loan early without penalty?
Why is my balance barely falling after a year of payments?
Does making bi-weekly payments help?
Is car loan interest tax-deductible in the US?
Sources & further reading
- Bankrate — Average Auto Loan Interest Rates 2026
- IRS — One Big Beautiful Bill Act: Auto Loan Interest Deduction
- Consumer Financial Protection Bureau — Auto Loans
Figures, prices and policy details were current at the last-updated date above. Automotive pricing, incentives and regulations change frequently — verify time-sensitive details with the linked primary sources. Read our editorial policy and fact-checking standards.
