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How a car loan payment is worked out

A car loan is a fixed-rate installment loan: the monthly payment is set so the amount financed, plus interest, is fully repaid over the term. The amount financed is the vehicle price, plus sales tax and any dealer fees you roll in, minus your cash down payment and the net value of a trade-in. If you still owe money on the trade-in, that balance gets added back — "negative equity" that increases the new loan.

Term length is the biggest lever on the monthly number. Stretching a loan from 60 to 72 or 84 months lowers the payment but raises total interest and keeps you "underwater" — owing more than the car is worth — for longer, because vehicles depreciate faster than the balance falls in the early years. A larger down payment (or a real trade-in) shrinks the loan directly and reduces both the payment and total interest.

Sales tax handling varies by state. Most states tax the price after subtracting the trade-in credit, which is why a trade-in can save more than its sticker value suggests; a few tax the full purchase price. This calculator uses the after-trade-in method and lets you set the rate. It does not include title, registration, documentation fees, extended warranties, or gap insurance — add those separately when comparing an "out-the-door" price.

APR vs. the advertised rate: dealers sometimes quote a low rate that assumes a specific lender, a strong credit tier, or add-on purchases. The APR reflects the all-in yearly cost. Get pre-approved by your own bank or credit union first so you have a real number to negotiate against, and compare the total cost of financing, not just the monthly payment.

Monthly payment: M = P × [ r(1+r)^n ] / [ (1+r)^n − 1 ]
  P = amount financed = price + sales tax + fees − down payment − (trade-in − amount still owed)
  r = APR ÷ 12
  n = loan term in months
Sales tax (typical) = (price − trade-in value) × tax rate.

Worked example with the default inputs

A $35,000 car with $3,000 down, no trade-in, 7% sales tax, 7.5% APR and a 60-month term: sales tax is $2,450, so the amount financed is $35,000 + $2,450 − $3,000 = $34,450. The monthly payment is $690.31, you repay $41,418.44 over five years, and $6,968.44 of that is interest.

What a longer term really costs

Keeping everything else the same and changing only the term:

Term        Monthly    Total interest
36 months   $1,071.61  $4,127.93
48 months   $832.96    $5,532.23
60 months   $690.31    $6,968.44
72 months   $595.64    $8,436.39
84 months   $528.40    $9,935.90

Going from 60 to 84 months lowers the payment by about $162 but adds almost $3,000 of interest — and in practice longer loans usually carry higher APRs too, which widens the gap further. A long term also means the car loses value faster than you pay the loan down, so you stay “underwater” for longer.

Trade-ins with negative equity

Suppose the same car is bought with a trade-in worth $12,000 on which you still owe $15,000. In most states the trade-in value reduces the taxable price, so tax falls to 7% of $23,000 = $1,610. But the $3,000 still owed on the old car is rolled into the new loan, which grows to $36,610. At 7.5% over 60 months the payment rises to $733.59 and interest to $7,405.36.

Rolling negative equity forward is common and legal, but it means paying interest on a car you no longer own. If you can, pay the shortfall in cash or keep the old car until the loan balance falls below its value.

Before you sign

• Compare the out-the-door price, not the monthly payment. A dealer can hit any monthly number by stretching the term.
• Ask for the APR and the term in writing, and check the finance contract matches what you agreed.
• Add-ons such as extended warranties, GAP insurance and paint protection are often rolled into the loan, so you pay interest on them too. Decide on each one separately.
• Fees — documentation, title and registration — vary by state and are not included here. Add them to the price if you plan to finance them.