How a car payment is worked out
A car loan is an amortizing loan: you pay the same amount every month, each payment covers that month's interest first, and the rest reduces the balance. The tricky part is not the payment formula but the amount financed, because the sticker price is only the starting point. Dealers add sales tax and fees, and your trade-in, down payment and any rebate are subtracted. If you still owe money on the car you are trading in, that payoff is added on top.
Sales tax = (price − trade-in) × tax rate (or price × tax rate where trade-ins are not credited)
Amount financed = price + sales tax + fees − down payment − rebate − trade-in + payoff still owed
Monthly payment = A × r ÷ (1 − (1 + r)^−n)
A = amount financed, r = APR ÷ 12, n = number of months
If you choose to pay the tax and fees upfront, they are left out of the amount financed and added to the cash you need on signing day instead.
Worked example
You buy a $35,000 car with a $4,000 down payment and a $1,000 rebate. Your old car is worth $8,000 as a trade-in, but you still owe $3,000 on it. Sales tax is 7% on the price minus the trade-in, fees are $800, and everything is financed at 6.5% APR for 60 months.
- Sales tax: (35,000 − 8,000) × 0.07 = $1,890
- Amount financed: 35,000 + 1,890 + 800 − 4,000 − 1,000 − 8,000 + 3,000 = $27,690
- Monthly payment: 27,690 × 0.0054167 ÷ (1 − 1.0054167^−60) = $541.79
- Total of 60 payments: $32,507.20, of which $4,817.20 is interest.
In a state that taxes the full price, the tax would be 35,000 × 0.07 = $2,450, the amount financed $28,250 and the payment $552.74, about $11 a month more for the same car.
How the loan term changes the cost
Stretching the same $27,690 at 6.5% over more months lowers the payment but raises the interest you pay:
| Term | Monthly payment | Total interest |
|---|---|---|
| 36 months | $848.67 | $2,862.15 |
| 48 months | $656.67 | $3,830.02 |
| 60 months | $541.79 | $4,817.20 |
| 72 months | $465.47 | $5,823.62 |
| 84 months | $411.18 | $6,849.20 |
Long terms have a second cost: a car loses value fastest in its first years, so with a 72- or 84-month loan you can owe more than the car is worth for a long time. That is called negative equity, and it is exactly the "still owed on trade-in" amount that gets rolled into the next loan.
Extra payments
Anything you pay on top of the required payment goes straight to the balance, so every later month charges less interest. In the example above, paying $100 extra a month clears the loan in 50 months instead of 60 and saves $882.87 in interest. Check that your lender applies extra payments to principal and does not charge a prepayment penalty.
Trade-ins, rebates and sales tax
- Trade-in credit: many states charge sales tax only on the price minus the trade-in value, which makes trading in at the dealer worth more than the trade-in figure alone. Some states, California for example, tax the full price. Choose "Full price" if yours does.
- Rebates: a manufacturer's cash rebate lowers what you borrow, but in many states sales tax is still charged on the price before the rebate. The calculator follows that rule.
- Negative equity: if you owe more on your old car than it is worth, the difference is added to the new loan. You pay interest on it again, so it is worth paying down if you can.
- Fees: documentation, title and registration fees vary a lot by state and dealer. Ask for the full "out-the-door" price in writing and enter those numbers.
APR and your credit score
The interest rate has more effect on the total cost than anything else you can negotiate. Lenders set your APR mostly from your credit history, the loan term and whether the car is new or used. Getting a pre-approval from a bank or credit union before you visit the dealer gives you a rate to compare with the dealer's financing offer. A 0% or very low APR deal from a carmaker is often offered instead of a cash rebate, so compare both: enter the rebate with a normal APR, then the 0% rate without the rebate, and see which total is lower.
Common mistakes
- Shopping by monthly payment. A dealer can hit almost any payment by stretching the term. Compare the total cost and the APR.
- Forgetting tax and fees. On a $35,000 car they can add $2,000–3,000 to what you borrow.
- Ignoring the old loan. The trade-in value is not what you get if you still owe on the car; only the difference is.
- Leaving out insurance and running costs. The loan payment is only part of what the car costs each month.
Estimates assume a fixed rate, monthly payments and interest charged monthly. Tax rules for trade-ins, rebates and fees differ by state; confirm the final figures on your purchase contract.
Frequently asked questions
How is a car loan payment calculated?
First find the amount financed: price + sales tax + fees − down payment − rebate − trade-in + any payoff still owed. Then apply the loan formula A × r ÷ (1 − (1 + r)^−n). $27,690 at 6.5% APR for 60 months is $541.79 a month.
Does a trade-in reduce sales tax?
In many US states, yes: sales tax is charged on the price minus the trade-in value. Some states, such as California, tax the full price. On a $35,000 car with an $8,000 trade-in and 7% tax, the credit saves $560.
Is it better to finance tax and fees or pay them upfront?
Paying them upfront means you do not pay interest on them. Financing them keeps more cash in hand but adds to the total interest over the loan.
Is a 72-month car loan a bad idea?
It lowers the payment, but you pay more interest and are more likely to owe more than the car is worth for years. Choose the shortest term whose payment fits your budget.
How much does an extra $100 a month save on a car loan?
On a $27,690 loan at 6.5% for 60 months, paying $100 extra each month ends the loan 10 months early and saves $882.87 in interest.
Sources
- Consumer Financial Protection Bureau (US). Auto loans: key terms, and What is a “negative equity” in an auto loan?
- Federal Trade Commission (US). Financing or leasing a car, consumer advice.
- Federal Reserve Board. Truth in Lending (Regulation Z): disclosure of the annual percentage rate and amount financed.
Last reviewed 20 October 2026. Results are estimates; see our disclaimer.