How a car loan payment is worked out
A car loan is a fixed-rate installment loan. The lender first works out how much you are borrowing, called the amount financed, and then spreads it over equal monthly payments. Two steps, two formulas.
Step 1: the amount financed.
(leave out sales tax and fees if you pay them upfront)
Step 2: the monthly payment.
P = amount financed · r = APR ÷ 12 · n = number of monthly payments
Sales tax is usually charged on the price after the trade-in credit, but before any manufacturer rebate. The calculator follows that rule by default. If your state taxes the full price, untick the trade-in tax option under More options.
Worked example 1: a $35,000 new car
You agree on a price of $35,000, put $5,000 down, and finance at 7% for 60 months. Sales tax is 7% and title, registration and the dealer’s documentation fee add $900.
- Sales tax: $35,000 × 7% = $2,450
- Amount financed: $35,000 − $5,000 + $2,450 + $900 = $33,350
- Monthly payment: $660.37
- Total interest over 5 years: $6,272.20
- Total cost of the car (price, tax, fees and interest): $44,622.20
Now pay the tax and fees upfront instead. You need $8,350 at signing rather than $5,000, but you borrow only $30,000. The payment drops to $594.04 and total interest falls to $5,642.16, so the car costs $630.04 less overall. Rolling tax and fees into the loan is convenient, but you pay interest on them for five years.
Worked example 2: a trade-in with negative equity
You buy a $32,000 car and trade in a vehicle worth $8,000, but you still owe $11,000 on it. Sales tax is 6%, fees are $700, and the loan is 7.5% for 72 months.
- Taxable amount: $32,000 − $8,000 = $24,000, so tax is $1,440
- Negative equity: $11,000 owed − $8,000 value = $3,000, added to the loan
- Amount financed: $32,000 − $8,000 + $11,000 + $1,440 + $700 = $37,140
- Monthly payment: $642.15, with $9,095.14 of interest
If the trade-in had been paid down to $8,000, you would finance $34,140 and pay $590.28 a month and $8,360.48 of interest. Carrying $3,000 of old debt into the new loan costs about $52 a month and $735 of extra interest. The FTC warns that dealers sometimes fold negative equity into the price or the loan without making it obvious, so check the contract line by line.
Worked example 3: how much car can I afford?
Switch the calculator to Car I can afford and start from the payment instead. Say you can manage $500 a month for 60 months at 6.9%, with $3,000 down, 7% sales tax and $800 of fees financed.
- $500 a month for 60 months at 6.9% repays a loan of $25,311.26
- After the down payment, tax and fees, that buys a car priced at about $25,711
- Total interest: $4,688.74
Stretching the same $500 to 72 months raises the price you can afford to about $29,542. That looks attractive, but you pay interest for an extra year and are more likely to owe more than the car is worth when you want to sell.
Payment by loan term
Longer loans lower the payment but cost more in interest. Here is $30,000 financed at 7%:
| Term | Monthly payment | Total interest |
|---|---|---|
| 36 months (3 years) | $926.31 | $3,347.26 |
| 48 months (4 years) | $718.39 | $4,482.59 |
| 60 months (5 years) | $594.04 | $5,642.16 |
| 72 months (6 years) | $511.47 | $6,825.85 |
| 84 months (7 years) | $452.78 | $8,033.55 |
Going from 36 to 84 months cuts the payment roughly in half but multiplies the interest by about 2.4. In real life the gap is bigger, because lenders usually charge a higher rate on longer terms. The calculator shows this table for your own loan under the results.
How the rate changes the cost
The same $30,000 loan at different APRs:
| APR | 36 months | 60 months | 72 months |
|---|---|---|---|
| 4% | $885.72 ($1,885.90 interest) | $552.50 ($3,149.74) | $469.36 ($3,793.60) |
| 6% | $912.66 ($2,855.69) | $579.98 ($4,799.04) | $497.19 ($5,797.44) |
| 8% | $940.09 ($3,843.27) | $608.29 ($6,497.51) | $526.00 ($7,871.80) |
| 10% | $968.02 ($4,848.56) | $637.41 ($8,244.68) | $555.78 ($10,015.81) |
| 12% | $996.43 ($5,871.45) | $667.33 ($10,040.01) | $586.51 ($12,228.42) |
| 15% | $1,039.96 ($7,438.55) | $713.70 ($12,821.87) | $634.35 ($15,673.23) |
Your credit score is the biggest driver of the rate. The CFPB suggests getting preapproved by a bank or credit union before you shop, so you have a rate to compare against dealer financing. The Federal Reserve’s G.19 release publishes average new-car loan rates at commercial banks if you want a benchmark.
What goes into the total cost
| Item | Included in the payment? | Notes |
|---|---|---|
| Negotiated price | Yes | Negotiate the price first, then the financing |
| Sales tax | Your choice | Usually on price minus trade-in |
| Title, registration, doc fees | Your choice | Doc fees vary widely by dealer and state |
| Trade-in value | Reduces the loan | Get an independent appraisal |
| Amount owed on trade-in | Added to the loan | Negative equity costs interest |
| Rebates | Reduce the loan | Sometimes offered instead of 0% financing |
| Interest | Yes | Set by APR and term |
| Insurance, fuel, maintenance | No | Budget for them separately |
Tips before you sign
- Negotiate the price, not the payment. A dealer can hit any monthly number by stretching the term. Agree on the out-the-door price first.
- Compare rebate vs low APR. Manufacturers often offer either cash back or cheap financing. Run both through the calculator: enter the rebate with your bank’s rate, then 0% (or the promo rate) with no rebate, and compare total cost.
- Watch add-ons. Extended warranties, GAP insurance and service plans are often added to the amount financed. They are optional; ask for the price of each.
- Check for prepayment terms. Most car loans are simple-interest loans you can pay early without a penalty, which makes extra payments worthwhile. Use More options to see what $50 or $100 a month extra saves. On a $25,000, 7%, 60-month loan, $50 extra a month ends the loan 6 months early and saves $522.62.
- Keep the whole budget in view. Check how the new payment fits with your other debts using the debt-to-income ratio calculator.
Common mistakes
- Using the sales tax rate on the wrong amount. In most states it applies after the trade-in, not after rebates. Getting this wrong can shift the tax by hundreds of dollars.
- Forgetting fees. Title, registration and documentation fees often add several hundred dollars or more, depending on the state and dealer.
- Comparing loans by payment alone. A lower payment over 84 months can cost thousands more than a higher one over 48. Compare total interest and total cost.
- Rolling negative equity again and again. Each time you trade in early with money owed, the debt grows. Paying the old loan down first breaks the cycle.
Related calculators
If you are weighing a lease, the auto lease calculator works out the payment from money factor and residual value. To check the sales tax on any purchase, use the sales tax calculator. For a full payment-by-payment table of any loan, try the amortization calculator.