How the amount financed is calculated
Your loan covers whatever is left of the purchase after cash and trade-in equity:
Amount financed = price + sales tax + fees − down payment − (trade-in value − amount owed)
In the example, $35,000.00 + $2,100.00 tax − $5,000.00 down = $32,100.00 financed. The monthly payment is then the standard fixed-rate loan payment on that amount: $635.62 for 60 months at 7% APR. The same formula powers our loan payment calculator.
How much car can I afford on my budget?
Choose My monthly budget and the calculator works backwards: it finds the loan amount your payment supports at your APR and term, adds back your down payment and trade-in equity, and takes out fees and sales tax to leave the car price. With the example's $600.00 a month, $5,000.00 down, 6% tax and 7% APR over 60 months, that is about $33,303.
A longer term raises the price the same payment covers (about $37,918 over 72 months) but adds $2,308.53 of interest, and the loan can outlast the time you keep the car. The budget is the loan payment only: insurance, fuel, maintenance and registration come on top.
Sales tax and trade-ins
Sales tax on a vehicle depends on your state and often your county or city. In some states, the value of your trade-in is subtracted from the price before tax is charged; in others, tax applies to the full price. The calculator does not assume either rule: tick Trade-in value reduces the taxable price if your state works that way. Your state's department of revenue or motor vehicle agency publishes the current rules and rates, and the buyer's order from the dealer shows the tax actually charged.
Fees are treated as untaxed amounts added to the loan. If you pay fees in cash instead, leave them out and they will not be financed.
What negative equity costs
If you owe more on your current car than it is worth, the difference does not disappear when you trade it in. A dealer or lender may roll it into the new loan, which makes that loan more expensive (CFPB: trading in a car that is not paid off). For example, trading in a car worth $5,000 with $9,000 still owed adds $4,000.00 to the example loan. That raises the payment to $714.82 and adds $752.29 of interest over the term. Paying the gap in cash, or waiting until the old loan balance is below the car's value, avoids this.
Choosing a loan term
For the example car, a 3 years loan costs $991.15 a month and $3,581.57 in interest; stretching it to 7 years lowers the payment to $484.48 but raises interest to $8,595.90. Longer terms also pay down the balance more slowly, so for longer you may owe more than the car would sell for. The comparison keeps your APR fixed; a lender may quote a different rate for a different term, so compare actual quotes.
Paying extra
The extra monthly amount is applied to principal from the first payment, so the loan ends early and total interest falls. Whether you can pay early without a penalty depends on your contract and state law; your Truth in Lending disclosure says whether a prepayment penalty applies (CFPB: prepaying a loan). Ask your lender how extra payments are applied.
Assumptions and limitations
- Fixed APR and equal monthly payments; monthly interest is the APR divided by 12 on the remaining balance.
- Sales tax applies to the vehicle price (or price minus trade-in if you choose); fees are not taxed.
- Manufacturer rebates, dealer add-ons, service contracts, GAP coverage and insurance are not modeled. Add any you are financing to the fees field.
- No tax rates, fees or APRs are assumed for any state or lender. Use the figures from your own quote.
- Amounts are calculated at full precision and rounded to cents for display, so a lender's figures may differ slightly.
- Results are estimates, not a loan offer, approval or financial advice.
Methodology and testing
The auto-loan engine turns the purchase into an amount financed and then uses the same tested amortization engine as our loan payment calculator. Automated tests cover trade-in equity and negative equity, both sales-tax treatments, fees, down payments that also cover tax and fees, term comparisons and invalid inputs, and are checked against independent calculations. Your inputs stay in your browser. How we build and test calculators.
Sources
- Should I trade in my car if it’s not paid off?, Consumer Financial Protection Bureau. Negative equity rolled into a new auto loan raises the amount financed, the interest paid and the monthly payment.
- Can I prepay my loan at any time without penalty?, Consumer Financial Protection Bureau. Whether a loan can be paid off early without a penalty depends on the contract and state law; the Truth in Lending disclosure says whether a prepayment penalty applies.
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