How it's calculated
A car loan works like any other fixed-rate installment loan: you borrow the amount financed and repay it in equal monthly payments that cover interest on the remaining balance plus a slice of principal. The CFPB defines the amount financed as the amount you're borrowing, and the total of payments as the sum of every payment you'll have made by the end of the term.CFPB
What you borrow starts with the price, adds sales tax and any fees you finance, and subtracts your cash down payment and trade-in. A down payment can be cash, a trade-in, or both.CFPB If you owe more on your trade-in than it's worth (negative equity), the difference is added to the new loan.
The formula
- Taxed price = vehicle price − trade-in value (or the full price, if your state taxes it before the trade-in).
- Sales tax = taxed price × your sales tax rate.
- Amount financed = price + sales tax + financed fees − cash down − trade-in value + amount still owed on the trade-in.
- Monthly payment = A × r ÷ (1 − (1 + r)−n), with A the amount financed, r the APR ÷ 12 and n the months. At 0% it is A ÷ n.
- Total interest = total of payments − amount financed.
- Total cost = total of payments + cash down + trade-in equity.
Worked example
A $35,000 car with $3,000 down, a $5,000 trade-in and 6% sales tax on the price after the trade-in has sales tax of $1,800 and an amount financed of $28,800. At 7% for 60 months the payment is $570.27, with $5,417 of interest.
| Line | Amount |
|---|---|
| Vehicle price | $35,000 |
| Sales tax (6% of $30,000) | $1,800 |
| Fees added to the loan | $0 |
| Cash down payment | -$3,000 |
| Trade-in value | -$5,000 |
| Amount financed | $28,800 |
| Interest over the loan | $5,417 |
| Total of payments | $34,217 |
Stretching the same loan to 84 months lowers the payment to $434.67 but raises the interest to $7,712.
Assumptions and limitations
- Your sales tax rate. Enter your combined state and local rate. Whether a trade-in lowers the taxed price, and which fees are taxed, depends on your state.
- Fees you finance. Title, registration, documentation and add-ons such as extended warranties increase the amount financed if they're rolled into the loan.
- Simple-interest fixed-rate loan. The rate is treated as the APR; if the lender charges upfront finance fees, the APR on your contract will be higher than the note rate.
- Rebates and incentives are not modeled. Subtract them from the price if they apply before tax in your state.