How a car payment is worked out
Start with the price, add the sales tax, then subtract your down payment and trade-in. What is left is the amount you borrow. Each month’s payment covers that month’s interest plus a slice of the balance, and the payment stays the same so the loan is paid off on the last month.
Payment = amount borrowed × r ÷ (1 − (1 + r)^−n), where r is the APR divided by 12 and n is the number of months.
For a $32,000 car with $4,000 down, a $6,000 trade-in, 8% sales tax and a 6.9% APR over 60 months, you borrow $24,080. The payment is $475.68 a month and the interest comes to $4,460.80. Stretch the same loan to 84 months and the payment drops to $362.26, but the interest grows to $6,349.84.
What the dealer adds
The price on the windshield is not what you borrow. Before you sign, the dealer’s buyer’s order lists every charge. Ask for it, or for the out-the-door price, before you talk about monthly payments.
- Documentation fee: the dealer’s charge for paperwork. Some states cap it; many don’t, so it varies a lot from dealer to dealer.
- Title and registration: state fees for the title, plates and registration. These go to the state and aren’t negotiable.
- Add-ons: extended warranties, gap insurance, paint and fabric protection, wheel locks. They are optional, often negotiable, and each one you finance also collects interest.
- Rebates: manufacturer cash off the price. In many states the tax is still figured on the price before the rebate.
- Negative equity: if you owe more on your trade-in than it is worth, the gap usually rolls into the new loan.
A low monthly payment can hide a long loan or a pile of add-ons. Compare the out-the-door price and the total interest, not only the payment.
What moves the payment most
The rate and the length of the loan matter more than most people expect. A bigger down payment lowers both the payment and the interest. A longer loan lowers the payment but raises the interest, and it can leave you owing more than the car is worth for the first few years. The Consumer Financial Protection Bureau suggests comparing rate and loan length offers before you visit the dealer. Entries stay in your browser and are not saved.