Auto Loan Formula
M = P[r(1+r)ⁿ] / [(1+r)ⁿ - 1]
M = monthly payment · P = principal · r = monthly rate · n = total months
The principal is what you actually borrow: the price, minus your down payment and trade-in, plus any amount still owed on the trade-in, plus tax and fees if you roll them into the loan. On a $35,000 car with $5,000 down, 6.5% sales tax and $1,200 of fees, that is about $33,500. At 7.14% for 60 months the payment is roughly $665 a month.
Being upside down on a car loan
A new car typically loses around 20% of its value in the first year and roughly 15% a year after that. A loan pays down slowly at first because most of the early payments are interest. For a while the balance is higher than the car is worth. That gap is called negative equity, or being upside down.
It matters if the car is written off or you want to sell. Insurance pays the car's value, not your balance, so you would still owe the difference. GAP insurance covers it, but a bigger down payment and a shorter term avoid the problem. The chart above shows exactly when your loan line drops below the value line.
The 20/4/10 rule
A simple guide many planners use: put at least 20% down, finance for no more than 4 years, and keep total car costs (payment, insurance, fuel) under 10% of gross monthly income. Few new-car deals meet all three today, but the further you drift from it, the more the car costs over its life.
Longer terms cost more than they look
A 72 or 84 month loan lowers the payment, which is why dealers offer it. Lenders also charge a higher rate for longer terms, and you pay that rate for longer. Switch between terms in the "Compare terms" chart to see the total interest climb as the payment falls.
Sales tax and trade-ins
In most US states you pay sales tax only on the price minus your trade-in value, which makes trading in worth more than its sticker value. A few states, including California, Michigan and Virginia, tax the full price. Check your state's rule and adjust the tax field if your dealer quotes differently.