How a car loan is figured
The amount you borrow is the price, minus your down payment and trade-in, plus anything you still owe on the trade-in, plus sales tax and fees if you roll them into the loan. The monthly payment then follows the standard loan formula.
Example: a $35,000 car with $3,000 down, an $8,000 trade-in, 7% tax on $27,000 ($1,890), and $1,000 in fees means borrowing $26,890. At 6.9% for 60 months that's about $531 a month and $4,981 in interest.
Sales tax and trade-ins
Most states charge sales tax only on the price after the trade-in, which can save hundreds of dollars. A few states, including California, Hawaii, and Virginia, tax the full price with no trade-in credit, and some others cap the credit. Several states also use a separate motor-vehicle tax rate, so check your state's DMV or revenue department.
Shorter vs. longer terms
A 72- or 84-month loan lowers the payment, but you pay more interest and you're more likely to owe more than the car is worth for the first few years. If you can afford the 48- or 60-month payment, you'll usually come out ahead.
Frequently asked questions
What is negative equity?
If you owe more on your trade-in than it's worth, the difference is negative equity. Dealers often add it to your new loan, which raises the payment and the interest you pay.
What's a good interest rate on a car loan?
It depends mostly on your credit score and whether the car is new or used. Compare offers from a bank or credit union with the dealer's financing before you sign.
Should I roll taxes and fees into the loan?
Paying them upfront means you borrow less and pay less interest. Rolling them in keeps more cash in your pocket today.