Car loans are one of the most common types of consumer debt, yet few people actually understand how they work. A typical car loan is structured like a standard installment loan: you borrow a fixed amount, pay interest on the balance, and repay the loan in equal monthly payments over a set number of months—usually 36, 48, 60, or even 84 months.

The cost of a car loan depends on three factors: principal, interest rate, and loan term. The principal is the amount you borrow after your down payment. The interest rate reflects the risk the lender takes; this varies based on your income, credit score, and the age of the car. New cars tend to have lower interest rates because manufacturers subsidize them, while used cars often come with higher rates.

But the term length is the real trap. A longer loan lowers your monthly payment but increases your total cost dramatically. For example, a €20,000 loan at 4% over 3 years costs far less in interest than the same loan stretched to 7 years at 6–7%. Many households choose longer terms to “afford” the monthly payment, not realizing they’re paying thousands extra over time.

Car loans also include additional fees—documentation fees, insurance requirements, and sometimes mandatory add-ons like service packages. Always check the APR, not the advertised interest rate. APR includes all fees and gives a clearer picture of the real cost. Understanding the structure helps you choose a term that fits your budget without draining your future.