How your car payment is calculated
Your loan amount is the vehicle price plus sales tax and fees, minus your down payment and trade-in. The monthly payment then spreads that amount — plus interest — evenly over the loan term.
Payment = Loan × r ÷ (1 − (1 + r)−n) where r = APR ÷ 12 and n = months
Sales tax and trade-ins
In most states you only pay sales tax on the price minus your trade-in value, which is why trading in at the dealer can save you money. A few states, including California and Michigan (above a set limit), tax the full price. Check your state's rule if the difference matters to you.
Example
A $35,000 car with $5,000 down, 6.5% sales tax, $800 in fees and a 60-month loan at 6.9% APR costs about $653 a month. You'd pay roughly $6,100 in interest over the life of the loan.
How to get a lower car payment
- Get pre-approved by a bank or credit union before visiting the dealer, so you can compare rates.
- Put more down. Aim for 10–20% to avoid owing more than the car is worth.
- Be careful with 72- and 84-month loans. The payment looks smaller, but you pay far more interest.
- Negotiate the price, not the payment. Dealers can hit any monthly number by stretching the term.
Frequently asked questions
What is a good interest rate for a car loan?
Rates depend on your credit score, whether the car is new or used, and the loan term. Borrowers with excellent credit get the lowest rates; used-car and subprime loans cost much more. Compare at least three lenders.
Is a 72-month car loan a bad idea?
It lowers the monthly payment but increases total interest, and you may owe more than the car is worth for years. If you choose one, pay extra whenever you can.
How much car can I afford?
A common rule is to keep your total car costs — payment, insurance and fuel — under 10–15% of your take-home pay.
Should I include sales tax in my car loan?
You can, but paying tax and fees upfront lowers your loan amount and total interest.
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