How your car payment is calculated
Your loan amount is the vehicle price plus sales tax, minus your down payment and trade-in. In most states, tax is charged only on the price after the trade-in is deducted - this calculator uses that rule. The lender then spreads the loan over your term with interest, using the standard amortization formula:
where P is the loan amount, r the monthly interest rate (annual rate ÷ 12), and n the number of months. Early payments are mostly interest; the balance falls faster near the end of the term. That is why the chart below the results starts shallow and steepens - and why a longer term keeps you owing money on a depreciating car for longer.
Frequently asked questions
How much car can I afford?
A common guideline is to keep all vehicle costs - loan payment, insurance, fuel, and maintenance - under 10-15% of your monthly take-home pay. On $4,000 take-home, that's roughly $400-600 total, which usually means a payment well under $400.
Should I finance through the dealer or my bank?
Get preapproved at a bank or credit union before you shop. Dealers can sometimes beat that rate with manufacturer promotions, but they can also mark up the rate they offer you. A preapproval gives you a real number to compare against and negotiating leverage.
Does the loan term really matter?
Yes. A longer term lowers the monthly payment but raises total interest, and because cars depreciate quickly, a 72-84 month loan can leave you underwater - owing more than the car is worth - for years. Aim for 60 months or less if the payment fits.