How your car payment is calculated
- Sales tax = (price − trade-in value) × tax rate.
- Amount financed = price + sales tax + fees − down payment − trade-in value + amount still owed on the trade-in.
- Monthly payment uses the standard amortization formula on the amount financed.
Payment = A × r ÷ (1 − (1 + r)−n), r = APR ÷ 12
Example: A $35,000 car with $5,000 down and an $8,000 trade-in. Sales tax at 7% applies to $27,000, so tax is $1,890. With $600 in fees, the amount financed is $24,490. At 6.9% for 60 months the payment is $483.78 and total interest is about $4,537.
Tips to get a better auto loan
- Get pre-approved by a bank or credit union before visiting the dealer. It gives you a rate to beat.
- Negotiate the price, not the payment. A dealer can hit any monthly payment by extending the term.
- Watch add-ons. Extended warranties, GAP insurance and paint protection add to the amount financed; add them to “fees” to see their true monthly cost.
- Keep the term short. Cars depreciate quickly — a shorter loan helps you build equity faster.
Planning a different type of loan? Try the general loan calculator, or check your overall borrowing with the debt-to-income calculator.
Frequently asked questions
Is sales tax included in an auto loan?
Usually, yes — most buyers roll sales tax and dealer fees into the loan. In most U.S. states the tax is charged on the price minus your trade-in value, which is how this calculator works. A few states tax the full price; if yours does, set the trade-in to 0 and subtract it from the down payment instead.
What happens if I owe money on my trade-in?
If you owe more than the trade-in is worth (negative equity), the difference is added to your new loan. Enter the payoff amount in “Amount owed on trade-in” to see its effect on the payment.
What is a good auto loan term?
Many advisors suggest 60 months or less. Longer 72- and 84-month loans lower the payment but raise total interest and increase the chance you owe more than the car is worth.
What is the 20/4/10 rule?
A traditional guideline: put at least 20% down, finance for no more than 4 years, and keep total car costs (payment, insurance, fuel) under 10% of gross income.
Is 0% dealer financing a good deal?
It can be, but dealers often offer either 0% financing or a cash rebate. Compare the payment at 0% with the payment on the lower price (after rebate) at a bank or credit union rate.