How a car loan is put together
The amount you borrow for a car is rarely just the sticker price. A dealer’s buyer’s order starts with the vehicle price and then adds and subtracts:
- Down payment — cash you pay at signing. It reduces the loan one-for-one.
- Trade-in — the dealer credits the value of your current car. If you still have a loan on it, the dealer pays that off and the payoff comes back into the deal. The difference is your equity: positive equity works like extra down payment; negative equity (owing more than the car is worth) is added to the new loan.
- Sales tax — charged at your combined state and local rate. Some states tax only the price after the trade-in credit; others tax the full price. Check with your state’s motor vehicle or revenue department and pick the matching option above.
- Fees — title and registration fees set by the state, and dealer charges such as a documentation fee. You can add them to the loan or pay them upfront.
What is left is the amount financed. The lender charges interest on it at the APR, spread over the term in equal monthly payments. The comparison table shows how the payment and total interest change between 36 and 84 months.
The car payment formula
First the amount financed, when tax and fees are added to the loan:
P = price − down − trade-in value + amount owed + tax + fees
Then the standard level-payment formula for a fixed-rate loan:
M = P × r ÷ (1 − (1 + r)⁻ⁿ)
- M
- monthly payment
- P
- amount financed
- r
- monthly rate: APR ÷ 12, as a decimal (7% → 0.07 ÷ 12 = 0.0058333)
- n
- number of monthly payments (the term in months)
At 0% APR the payment is simply P ÷ n. Each payment is rounded to the cent and the final payment is adjusted so the balance ends at exactly zero, which is why the total of payments is not always the payment times the term. Sales tax is rounded half-up to the cent.
Worked example
You buy a $35,000 car with $4,000 down. The dealer gives you $8,000 for your old car, which still has $3,000 left on its loan. Sales tax is 7% on the price after the trade-in, fees are $1,200, and you add both to a 60-month loan at 7% APR.
- Trade-in equity: $8,000 − $3,000 = $5,000
- Sales tax: ($35,000 − $8,000) × 7% = $1,890
- Amount financed: $35,000 − $4,000 − $8,000 + $3,000 + $1,890 + $1,200 = $29,090
- Monthly rate: 7% ÷ 12 = 0.0058333; payments: 60
- Payment: $29,090 × 0.0058333 ÷ (1 − 1.0058333⁻⁶⁰) = $576.02
Over five years you pay $5,470.99 in interest (the last payment is $575.81). Price, tax, fees and interest together make the car cost $43,560.99. Stretching the same loan to 84 months drops the payment to $439.05 but raises the interest to $7,789.78; a 36-month loan costs $898.21 a month and $3,245.77 in interest.
Things to check before you sign
- Negative equity is expensive. If the same buyer owed $11,000 on an $8,000 trade-in, the $3,000 shortfall would be financed too: $37,090 borrowed, a payment of $734.43 and $6,975.56 of interest. The CFPB warns that rolling an old balance into a new loan raises the total cost; get your current loan’s payoff amount before you shop.
- Compare the total, not only the payment. A longer term is the easiest way to make a payment look affordable, and at the same APR it always adds interest.
- Know what is negotiable. According to the CFPB, the APR, the term, the trade-in value, optional add-ons and dealer fees can be negotiated; taxes, title and registration fees set by the state cannot.
- Get a rate before you visit. A preapproval from a bank or credit union gives you an APR to compare with the dealer’s financing offer.
Other calculators
To see the loan month by month, use the amortization calculator. For a loan without vehicle costs, the loan calculator is simpler, and the sales tax calculator handles the tax on its own.
Frequently asked questions
Is sales tax charged before or after the trade-in?
It depends on the state. Some states tax only the difference between the price and the trade-in value, while others tax the full price of the new car. Your state’s motor vehicle or revenue department states the rule; choose the matching option in the calculator.
What happens if I owe more on my trade-in than it is worth?
That is negative equity. The dealer pays off your old loan and adds the shortfall to the new one, so you borrow more and pay interest on the old debt again. Paying the difference in cash, or waiting until the old loan is smaller, avoids this.
Should I finance the sales tax and fees or pay them upfront?
Paying them upfront lowers the amount financed and the interest you pay. Financing them keeps more cash in hand but costs interest for the whole term. Switch the option in the calculator to compare both.
Is a 72- or 84-month car loan a good idea?
It lowers the monthly payment but raises the total interest at the same APR, and you pay the balance down more slowly, so you may owe more than the car is worth for longer. The term comparison table shows the trade-off for your numbers.
What is the difference between the interest rate and the APR?
The APR is the yearly cost of the loan expressed as a rate, including some finance charges as well as interest. Lenders must disclose it, so it is the best figure for comparing offers. The calculator treats the rate you enter as the APR.
Sources
Last reviewed September 19, 2026