How your car payment is calculated
We start with the price, then subtract your down payment and your trade-in’s equity: what it’s worth minus what you still owe on it. Sales tax is worked out on the price (after the trade-in, in most states), and taxes and fees are either added to the loan or paid at signing. What’s left is the amount financed.
That amount is repaid in equal monthly payments. Each payment covers the month’s interest first, and the rest lowers your balance, the same way a mortgage works.
Ways to pay less
Get a rate quote from your bank or credit union before you visit the dealer, so you have a number to beat. Put down what you comfortably can, and keep the term as short as your budget allows. Look at the “Extra interest vs. shortest” column above: that’s money you pay only for the longer term.
Common questions
How long should a car loan be?
Shorter is cheaper. A longer term lowers the monthly payment, but you pay interest for more months, and you’re more likely to owe more than the car is worth for longer. Many buyers aim for 60 months or less. The table above shows the extra interest each longer term costs.
Should I add sales tax and fees to the loan?
Paying them at signing saves the interest you’d pay on them, and it keeps your loan closer to what the car is worth. Adding them to the loan keeps more cash in your pocket today. Flip the switch above to see the difference in your payment and total interest.
What is negative equity on a trade-in?
If you owe more on your current car than it’s worth, the difference is negative equity. Dealers usually add it to your new loan, so you pay for it again, with interest. Paying it down first, or waiting until your loan balance drops, avoids that.
Does my trade-in lower the sales tax?
In most states, yes: you pay sales tax only on the price minus your trade-in’s value. A few states, including California, tax the full price. If yours does, turn off “Tax only the price after trade-in.”
How accurate is this estimate?
The payment math is exact for a simple-interest loan with fixed monthly payments, which is how most auto loans work. Your sales tax, fees and rate depend on your state, dealer and credit, so use the numbers from your buyer’s order when you have them.
Methodology
- Amount financed = price − down payment − trade-in equity (+ sales tax and fees, if added to the loan). Negative equity is added to the loan.
- Sales tax = the rate you enter × (price − trade-in value), or × the full price if you turn off the trade-in credit. Rebates and incentives aren’t modeled.
- Fixed-rate, simple-interest loan. Interest each month is the balance × (annual rate ÷ 12), rounded to the cent. The last payment absorbs any rounding.
- “What the car really costs you” adds the price, sales tax, fees and all interest paid over the loan.
- Not included: insurance, registration renewals, extended warranties, GAP coverage and dealer add-ons.
Sources: Consumer Financial Protection Bureau; state department of revenue sales tax guidance. Last reviewed .