What goes into a car payment
A car loan is an amortizing installment loan, but the amount you finance is more than the sticker price minus your down payment. Sales tax, title and registration fees and dealer documentation fees are often rolled into the loan, while a trade-in reduces it. This calculator works out the amount financed as: vehicle price + sales tax + fees − down payment − trade-in. It then applies the standard loan formula to find the monthly payment.
For a $35,000 car with $5,000 down, no trade-in, 7% sales tax, $800 of fees, a 6.9% APR and a 60-month term, the amount financed is $33,250 and the payment is about $656.82 a month.
How trade-ins affect sales tax
In most US states, the value of your trade-in is subtracted from the purchase price before sales tax is calculated, which can save hundreds of dollars. A $10,000 trade-in at 7% tax saves $700 in tax on top of the $10,000 reduction in price. This calculator applies that rule. A few states, including California, Hawaii, Kentucky, Maryland, Michigan, Montana and Virginia, tax the full price or limit the credit, so adjust the tax rate if your state is one of them. Manufacturer rebates may or may not be taxed depending on where you live.
Choosing a loan term
Car loans of 72 and 84 months have become common because they make payments look affordable, but they come with real costs. Longer loans usually carry higher interest rates, and cars lose value quickly, often 20% or more in the first year. With a long loan you can owe more than the car is worth for several years, which is a problem if it is written off or you want to sell. Many advisers suggest the 20/4/10 guideline: put at least 20% down, finance for no more than 4 years, and keep total car costs, including insurance and fuel, under 10% of gross income.
Tips for getting a better deal
Get preapproved by a bank or credit union before visiting the dealer so you know what rate you qualify for, then let the dealer try to beat it. Negotiate the price of the car separately from the financing and the trade-in, because combining them makes it easy to hide costs. Be cautious with add-ons such as extended warranties and gap insurance sold in the finance office; they can be useful but are often cheaper elsewhere. Finally, look at total cost, shown in your results, as well as the monthly payment. Pair this tool with our fuel cost calculator to estimate running costs before you buy.
Frequently asked questions
Is sales tax included in a car loan?
Often, yes. Unless you pay it up front, sales tax and fees are usually added to the amount financed.
Does a trade-in reduce sales tax?
In most states the trade-in value is deducted before tax is calculated. A few states do not allow this or cap the credit.
What is a good APR for a car loan?
It depends on your credit score and whether the car is new or used. Borrowers with excellent credit typically get the lowest rates, while used-car and subprime loans cost more.
How long should a car loan be?
Shorter is cheaper. Many experts recommend 48 months or less to avoid owing more than the car is worth.