Walking into a dealership knowing your monthly payment is the best way to avoid a bad deal. The math behind a car loan is the same amortization used for any loan — the trick is getting the amount financed right first, since down payments, trade-ins, and sales tax all change it.
Step 1: Find the amount financed
Before any interest math, figure out how much you're actually borrowing:
Amount financed = price − down payment − trade-in + sales tax
Sales tax in most U.S. states is charged on the price after the trade-in is subtracted, which lowers it. So for a $32,000 car with a $4,000 trade-in and 7% tax:
- Taxable amount: $32,000 − $4,000 = $28,000
- Sales tax: $28,000 × 7% = $1,960
If you also put $4,000 down, the amount financed is $32,000 − $4,000 − $4,000 + $1,960 = $25,960.
Step 2: Apply the loan formula
That financed amount runs through the standard monthly payment formula:
M = P × [ r(1 + r)^n ] ÷ [ (1 + r)^n − 1 ]
where r is the APR ÷ 12 and n is the term in months. At a 7.5% APR over 60 months, $25,960 comes to roughly $520 per month, with around $5,200 in total interest.
APR vs. interest rate
The APR includes certain loan fees on top of the base interest rate, so it's a more honest measure of cost. Always compare offers by APR, and remember a longer term lowers the monthly payment but raises the total interest you pay.
How to use it
Skip the spreadsheet and let the Auto Loan Calculator do it. Enter the vehicle price, down payment, trade-in, sales tax, APR, and term, and it returns your monthly payment, amount financed, and total interest instantly — perfect for comparing two financing offers side by side.
For any non-car borrowing the Loan Calculator uses the same engine, and to check whether a payment fits your budget, run your pay through the Salary Converter to see your real monthly take-home.