1. Gather Loan Information

You will need:

Vehicle price: The total cost of the car.
Down payment: The amount you’re paying upfront.
Loan term: The duration of the loan (in months or years).
Interest rate: The annual interest rate for the loan.
Trade-in value (if applicable): The value of any vehicle you’re trading in.
Sales tax (optional): Some calculators allow you to include taxes.

After gathering this above information, you can use this calculator. Now input the information as per instructions:

2. Input the Vehicle Price
Enter the total price of the car, as listed by the dealer.

3. Add Down Payment
Input the amount you’re putting down upfront to reduce the loan amount.

4. Enter the Loan Term
Choose the repayment period, typically between 36 and 72 months.

5. Input the Interest Rate
Enter the interest rate offered by your lender, for example, 4.5%.

6. Include Trade-In Value (If Applicable)
If you’re trading in a vehicle, enter its value to further reduce the loan amount.

7. Calculate and Review
After entering all details, click “Calculate.” The calculator will display:

Monthly payment: Your monthly payment amount.
Total interest paid: The total interest over the life of the loan.
Total loan cost: The full cost, including interest.

This step-by-step process helps you estimate your auto loan payments and budget for your car purchase.

The Auto Loan Calculator is primarily designed for car purchases within the U.S., but it can be adapted for international users. If you’re only given the monthly payment details of a loan, use the “Monthly Payments” tab (also known as the reverse auto loan option) to calculate the actual purchase price and other key loan details.

Auto Loans: An Overview

Auto loans are one of the most common methods of financing vehicle purchases, particularly in the U.S. Like other secured loans, auto loans are typically issued by a financial institution, such as a bank or credit union, with the car itself serving as collateral. Loan terms can vary, but most U.S. auto loans have terms of 36, 60, 72, or 84 months. Borrowers make monthly payments that cover both the principal and the interest. If a borrower fails to repay the loan, the lender has the legal right to repossess the vehicle.

Financing Options: Dealership Financing vs. Direct Lending

When purchasing a vehicle, buyers generally have two primary options for financing: dealership financing and direct lending. Both options come with their own advantages and considerations.

Direct Lending

In direct lending, the borrower obtains an auto loan from a bank, credit union, or other financial institution. After securing the loan, the borrower uses it to pay for the car from the dealer. This type of loan gives the buyer greater flexibility and leverage, as they enter the dealership with pre-approved financing. Direct lending can offer several benefits:

• Leverage: Since the financing is secured outside of the dealership, buyers can negotiate the price of the car more freely. Car dealers are incentivized to offer better rates to compete with external lenders.
• Shopping around: Buyers have the option to compare loan offers from multiple financial institutions, allowing them to find the most competitive rates and terms.

Pre-approval through direct lending also enables buyers to walk away from a dealership if they are unhappy with the deal being offered, giving them additional negotiating power.

Dealership Financing

Dealership financing, on the other hand, allows buyers to obtain a loan directly from the car dealership. The dealership typically partners with captive lenders, which are financial institutions associated with the car manufacturer. In this arrangement, the loan process is handled entirely by the dealer, which may be more convenient for some buyers. The dealership will often sell the loan to a third party (a bank or other financial institution) that services the loan after the sale.

Some advantages of dealership financing include:

• Convenience: Buyers can arrange financing and purchase the vehicle in one place, without needing to visit a bank or credit union separately.
• Promotional rates: To boost sales, car manufacturers may offer low-interest financing deals through their dealerships, such as 0%, 0.9%, or 1.9% APR. These promotions are typically available for new vehicles and can be a compelling option for buyers.

However, dealership financing often comes with fewer rate options, as buyers are limited to the lenders the dealership works with. In addition, the interest rates offered by dealerships may not always be the most competitive, so it’s essential for buyers to do their homework before committing to dealer financing.

Vehicle Rebates: Extra Incentives for Buyers

In addition to promotional interest rates, car manufacturers frequently offer vehicle rebates to encourage purchases. Rebates are essentially discounts offered by the manufacturer to reduce the car’s purchase price. While most rebates are for new vehicles, some used car dealers may offer rebates, though this is rare and usually depends on the availability of certified pre-owned (CPO) vehicles.

How Rebates Work

When a buyer receives a rebate, it reduces the final purchase price of the car. However, the way rebates are taxed can vary by state. In most cases, sales tax is applied to the car’s original price, before the rebate is deducted. For instance, if a car is priced at $50,000 with a $2,000 rebate, the sales tax would still be calculated based on the $50,000 figure, not the reduced $48,000.

Fortunately, some states have more favorable rules regarding rebates, where sales tax is calculated after the rebate is applied. These states include:

• Alaska
• Arizona
• Delaware
• Iowa
• Kansas
• Kentucky
• Louisiana
• Massachusetts
• Minnesota
• Missouri
• Montana
• Nebraska
• New Hampshire
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• Texas
• Utah
• Vermont
• Wyoming

Buyers in these states will benefit from a lower overall tax burden when applying rebates to their vehicle purchases.

Rebates on Used Cars

While rebates are more common for new cars, there are rare instances where used cars, especially certified pre-owned vehicles, may qualify for rebates or other financial incentives. However, determining the true value of a used vehicle can be more complicated, making rebates on used cars less common.

Auto Loan Fees

When buying a car, there are several additional costs beyond the vehicle’s purchase price, most of which come in the form of fees. These can either be rolled into the financing of the auto loan or paid upfront. However, buyers with low credit scores may be required to pay some fees upfront. Below is a list of common fees associated with car purchases in the U.S.:

Sales Tax: Most U.S. states charge sales tax on car purchases. The cost of the sales tax can often be financed along with the vehicle’s price, depending on state regulations. However, five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not charge sales tax.

Document Fees: Dealers charge this fee to cover the processing of paperwork, such as the title and registration.

Title and Registration Fees: These fees are collected by the state for issuing the vehicle’s title and registration.

Advertising Fees: This is a fee charged by dealers to cover the cost of advertising the car. It is usually a few hundred dollars and may be included in the vehicle price if not listed separately.

Destination Fee: This fee covers the cost of shipping the car from the manufacturer to the dealership and typically ranges between $900 and $1,500.

Insurance: Auto insurance is mandatory in the U.S. to legally drive on public roads. If you’re financing a vehicle through a loan, most lenders will require full coverage insurance. Full coverage insurance can cost over $1,000 per year. Some dealers offer short-term insurance to help buyers complete the purchase paperwork, but this is a temporary solution.

When calculating your total loan, you can either bundle these fees into the loan by checking the “Include All Fees in Loan” option in a calculator or pay them upfront.

Auto Loan Strategies

Preparation:
Being well-prepared is the key to securing a great auto loan. Before heading to a dealership, figure out your budget and what kind of vehicle you need. Research the market to get an idea of typical prices for your preferred make and model. This will give you leverage when negotiating with dealers. Also, getting pre-approved for a loan from a direct lender can provide you with negotiating power, allowing you to focus on finding the best deal.

Credit
Your credit score and income will largely determine whether you qualify for an auto loan and what interest rate you receive. Borrowers with excellent credit scores tend to secure lower interest rates, reducing the overall cost of the car. To improve your chances of getting a good deal, consider working on boosting your credit score before applying for a loan.

Cash Back vs. Low Interest
When purchasing a vehicle, manufacturers often offer either cash rebates or low-interest financing. A cash rebate reduces the car’s purchase price upfront, while a lower interest rate could lead to savings over the life of the loan. The best choice depends on your situation, and it can be helpful to use a Cash Back vs. Low Interest Calculator to decide which option is more beneficial.

Early Payoff
Paying off your auto loan early can help you save on interest and shorten the loan term. However, some lenders may charge early payoff penalties, so be sure to carefully review the loan agreement for any restrictions.

Consider Other Options
While a new car is appealing, buying a pre-owned vehicle can result in significant savings. New cars lose value as soon as they leave the dealership—often more than 10%—which is referred to as off-the-lot depreciation. A used car, even just a few years old, may offer much better value.

If the excitement of driving a new car is your primary concern, consider leasing instead of buying. Leasing is essentially a long-term rental, and it usually costs less upfront. If you’re interested in exploring lease options, use an Auto Lease Calculator to see what works best for you.

Lastly, ask yourself if owning a car is truly necessary. Depending on where you live, public transportation, carpooling, biking, or walking might be viable alternatives to purchasing a vehicle.

Buying a Car with Cash

Although the majority of car purchases in the U.S. are made through auto loans, there are several advantages to paying for a car in full with cash.

Avoid Monthly Payments: When buying a car with cash, you’re free from the responsibility of monthly payments, offering peace of mind. There’s no need to worry about a looming loan or the stress of late fees for missed payments.

Save on Interest: Without financing, you won’t have to pay interest on the loan, reducing the overall cost of the car. For instance, borrowing $32,000 at 6% interest over five years results in monthly payments of $618.65, with a total interest of $5,118.98. Paying in cash avoids this extra cost entirely.

Future Flexibility: Full ownership of the car is immediate, allowing you to sell it whenever you choose, select less expensive insurance coverage, or make modifications without any restrictions from a lender.

Prevent Overbuying: Paying in full ensures that you stay within your budget. Financing, on the other hand, can lead to overspending, as buyers may be tempted to stretch their loan for a more expensive vehicle. Salespeople often use various tactics like fees and complicated financing to encourage buyers to purchase beyond their means. Paying with cash eliminates this risk.

Potential Discounts: In some cases, cash buyers may be offered rebates that aren’t available with financing. These rebates can further reduce the vehicle’s overall cost.

Avoid Underwater Loans: When financing a depreciating asset like a car, there’s a risk of being “underwater,” meaning you owe more on the loan than the car is worth. Paying with cash avoids this issue entirely.

While buying a car with cash has many benefits, it’s not always the best choice for everyone. For instance, if a car buyer is offered a very low interest rate, they might benefit more by financing the purchase and using their cash for other investments with higher returns. Additionally, those looking to build their credit score could choose to finance the car and make consistent, on-time payments, which will improve their creditworthiness for future financial needs.

Ultimately, the decision between paying in cash or financing should be based on each person’s financial situation and long-term goals.

Trade-In Value

A trade-in allows you to sell your current vehicle to the dealership in exchange for credit toward purchasing a new one. However, trade-ins typically don’t offer high value compared to selling privately, which is often a more financially advantageous option.

For states that collect sales tax on car purchases, the sales tax is usually calculated based on the difference between the price of the new car and the trade-in value. For example, if you’re buying a $50,000 car with a $10,000 trade-in at an 8% sales tax rate, the tax would be calculated as:

($50,000 – $10,000) × 8% = $3,200

However, some states don’t offer sales tax reductions for trade-ins. These include California, District of Columbia, Hawaii, Kentucky, Maryland, Michigan, Montana, and Virginia. In these states, sales tax is based on the full purchase price of the car. For example:

$50,000 × 8% = $4,000

This results in an $800 difference, which can make private car sales more appealing for residents in these states.

Our Auto Loan Calculator automatically adjusts the method used to calculate sales tax based on the state provided, ensuring you get an accurate estimate of the cost whether or not a trade-in is involved.

Conclusion

When purchasing a car, it’s essential to consider all aspects of financing, whether through direct lending or dealership financing. Both options have their merits, depending on the buyer’s needs, financial situation, and the deals available. Additionally, understanding how rebates and promotional financing work can help buyers secure a better deal and reduce the overall cost of purchasing a vehicle. Always remember to explore all financing options and use tools like the Auto Loan Calculator to estimate monthly payments and overall costs before making a final decision.