What Changes a Car Loan Payment? Rate, Term, Down Payment and Trade-In

A dealer asks what monthly payment you are comfortable with, and that is the question that costs people money. A payment is the result of five choices: the price, the down payment, the interest rate, the loan term and what you owe in tax and fees. Change one at a time and you can see exactly what each is worth.

How a car payment is calculated

The loan amount is the price plus sales tax and fees, minus your down payment and your trade-in. The monthly payment then comes from the standard loan formula: payment = L × r × (1 + r)^n ÷ ((1 + r)^n − 1), where L is the loan amount, r is the monthly interest rate (annual rate ÷ 12) and n is the number of months. The Car Payment Calculator does this and also shows total interest and total cost.

The baseline: a $35,000 car

Take a $35,000 car with $5,000 down at 5.5 percent for 60 months, with no tax or fees. The loan is $30,000. The payment is $573.03, total interest is $4,382.09 and the car costs $39,382.09 including the down payment.

Changing the term

A longer term lowers the payment and raises the interest.

Going from 60 to 84 months drops the payment by $141.93 but adds $1,830.42 of interest. Long loans also keep you in debt for longer, and a car loses value quickly, so you can owe more than the car is worth for years.

Changing the interest rate

At 60 months on the same loan:

• 3.5 percent: $545.75 a month, $2,745.14 interest.
• 5.5 percent: $573.03 a month, $4,382.09 interest.
• 7.5 percent: $601.14 a month, $6,068.31 interest.
• 9.5 percent: $630.06 a month, $7,803.35 interest.

Four percentage points on the rate cost $5,058 more in interest over the loan. That is why getting pre-approved by a bank or credit union before you visit the dealer is worth the time: it gives you a real rate to compare with the dealer's.

Changing the down payment

With 5.5 percent over 60 months:

• No down payment: $668.54 a month, $5,112.44 interest.
• $5,000 down: $573.03 a month, $4,382.09 interest.
• $10,000 down: $477.53 a month, $3,651.74 interest.

Each extra $5,000 down lowers the payment by about $95.50 and the interest by $730.35.

Trade-in, tax and fees

A trade-in reduces the loan, and in many US states it also reduces the amount that sales tax is charged on. As an example, take the same $35,000 car with a $5,000 down payment, an $8,000 trade-in, 7 percent sales tax on the price minus the trade-in, and $500 of fees. The tax is $1,890, the loan is $24,390 and the payment over 60 months is $465.88. Rules differ by state and country, so enter the rate and the treatment that apply to you.

What an extra payment does

Paying $100 more each month on the baseline loan cuts the interest to $3,635.30 and clears the loan in 50 months instead of 60. The calculator shows the interest and months you save for any extra amount.

Not in the calculation

Insurance, fuel, maintenance and registration are separate, as are dealer add-ons and any charges for paying early. Some lenders also quote an APR that includes fees, so compare the APR to the rate you enter.

A short checklist

1. Get a pre-approved rate first.
2. Use the shortest term whose payment fits your budget.
3. Put down as much as you comfortably can.
4. Enter tax and fees so the loan amount is right.
5. Compare against other debts with the Loan Calculator, and see how loan payments work.
6. If you are saving for the down payment, the Savings Goal Calculator shows how long it will take, and the Rent Affordability Calculator helps you check that the payment fits your monthly budget.