Plain Finance

Auto Loan Calculator

Work out a car payment including tax, fees and a trade-in — and see the thing most car calculators leave out: how long you would owe more than the car is actually worth.

The car

9% of the price · financing $35,050.00

Rolled into the new loan if it exceeds the trade-in value.

The loan

Tax & fees

Most states tax the price less your trade-in.

Monthly payment

$606.02

financing $35,050.00 over 72 months

you would owe more than the car is worth for 2 years, 8 months

Amount financed
$35,050.00
Sales tax
$2,450.00
Total interest
$8,583.29
Total cost of the car
$46,633.29

Worst negative equity

$2,244

is the most you would be short if you sold or wrote the car off, at month 12. You are above water from month 33. Until then, gap insurance is worth pricing.

What you owe vs what it is worth

A car loses roughly a fifth of its value in the first year. Where the owed line sits above the value line, selling the car would not clear the loan — you would have to write a cheque for the difference.

  • What you owe
  • What it is worth

You finance more than the car costs

The first surprise on any car deal is the amount financed. It is not the price minus your down payment, because sales tax, title, registration and dealer documentation fees are almost always rolled into the loan as well.

On the example loaded above — a $35,000 car, $3,000 down, 7% sales tax and $600 of fees — you finance $35,050. You have handed over $3,000 in cash and you are still borrowing more than the sticker price. That gap is where negative equity begins, before you have driven anywhere.

One detail worth knowing if you are trading a car in: most US states charge sales tax on the price less the trade-in allowance. Trading a $10,000 car in against a $35,000 purchase means paying tax on $25,000, which at 7% saves $700 — a real advantage of trading in rather than selling privately, and one that often offsets the lower price a dealer offers.

Why cars go underwater and houses do not

A mortgage and a car loan use identical maths. What differs is the asset. Houses generally hold or gain value; cars lose roughly a fifth of theirs in the first year and around 15% a year after that.

So the two lines in the chart above move in opposite directions relative to each other. The loan balance falls steadily. The car's value falls faster at first, then more slowly. Early on the balance sits above the value, and the gap between them is negative equity — the amount you would have to pay out of pocket simply to walk away.

That matters in exactly two situations, and both are ones you do not choose:

  • You need to sell. A job move, a new baby, a car that turns out to be wrong for you. Selling while underwater means writing a cheque to your lender for the privilege of giving the car away.
  • The car is written off. Insurance pays what the car was worth, not what you owe. The difference is yours unless you carry gap insurance.

The term is the whole story

Long loans are sold as affordability. What they actually do is keep you underwater. Same car, same rate, same $3,000 down — only the term changes:

  • 36 months: $1,090 a month, $4,200 interest, never underwater.
  • 48 months: $847 a month, $5,629 interest, underwater for 4 months.
  • 72 months: $606 a month, $8,583 interest, underwater for 32 months.
  • 84 months: $538 a month, $10,109 interest, underwater for 48 months.

Halving the payment from $1,090 to $538 costs you $5,900 in extra interest and four years of negative equity. The monthly figure went down; nothing else did.

There is a second-order problem too. An 84-month loan usually outlasts the factory warranty, so somewhere around year five you are making payments on a car that has also started generating repair bills. That is when people trade in early, roll the remaining negative equity into the next loan, and start the whole cycle deeper than they began.

How to avoid it

  • Put around 20% down. Unlike the mortgage rule of thumb, this one has a concrete rationale: 20% roughly offsets the first year of depreciation, which is what keeps you from going underwater at all.
  • Keep the term to 48 months or less where you can. If the payment only works at 72 or 84, that is information about the car's price, not about financing.
  • Do not roll old negative equity forward. Adding what you still owe on the last car to the new loan starts you deeper in the hole and lengthens the time you spend there. The calculator above models this if you want to see the damage.
  • Price gap insurance separately. Buy it only for the period the calculator says you are exposed, and not from the dealer, who marks it up heavily.
  • Arrange financing before you shop. A pre-approval from a bank or credit union gives you a rate to beat and moves the negotiation to the price of the car rather than the size of the payment.

What this calculator does not include

Insurance, fuel, maintenance, tyres and repairs — the running costs, which over a six-year loan commonly exceed the interest. It also uses generic depreciation rates of 20% in the first year and 15% thereafter; real depreciation varies enormously by make, model and mileage, and some vehicles hold value far better than others. Treat the equity timeline as a good estimate rather than a guarantee, and check actual resale values for the specific car you are considering.

Frequently asked questions

How is a car payment calculated?

With the same formula as any fixed-rate instalment loan: the amount financed, the monthly interest rate, and the number of months determine a fixed payment that clears the balance over the term. The part people get wrong is the amount financed. It is not the sticker price minus your down payment — sales tax, title, registration and dealer documentation fees are usually rolled in too. On a $35,000 car with $3,000 down, 7% tax and $600 in fees, you finance $35,050. That is more than the car costs, despite putting $3,000 down.

What does it mean to be underwater on a car loan?

It means you owe more than the car would sell for, also called negative equity. It happens because cars depreciate faster than a long loan amortizes — roughly 20% of value in the first year and around 15% a year after that. While you are underwater you cannot sell the car without paying the difference in cash, and if it is written off your insurer pays only what the car was worth, leaving you owing the rest. The calculator above shows exactly how long that lasts and how deep it gets.

How long will I be underwater?

It depends almost entirely on your down payment and term. On the example above — $35,000 car, $3,000 down, 7.5% — a 72-month loan leaves you underwater for 32 months and short by as much as $2,244. Stretch it to 84 months and that becomes 48 months underwater and $3,189 short. Take 36 months instead and you are never underwater at all. Put 20% down and the same is true even over a longer term.

Is a 72 or 84-month car loan a bad idea?

It is a way of buying a more expensive car than you can afford, dressed as a lower payment. On our example, going from 36 to 84 months drops the payment from $1,090 to $538 — but the interest rises from $4,200 to $10,109, and you spend four years underwater instead of none. There is also a practical trap: the loan often outlasts the warranty and sometimes your interest in the car, so you are making payments on something that has started costing you repairs. If the only way the payment works is 84 months, that is useful information about the car, not about the loan.

Should I put 20% down?

It is a good target, and unlike the mortgage version of the rule there is a concrete reason: 20% down roughly offsets the first year of depreciation, which is what keeps you from going underwater at all. That protects you from the two bad outcomes — needing to sell early, or a write-off — and it lowers the amount you pay interest on. If you cannot manage 20%, a shorter term achieves much of the same protection, because principal falls faster.

Do I need gap insurance?

Only while you are underwater, which is exactly what this calculator tells you. Gap insurance covers the difference between what your insurer pays for a written-off car and what you still owe. If the calculator shows you are never underwater, it is money wasted. If it shows 32 months underwater and a worst-case shortfall of $2,244, then that is the risk you would be insuring. Dealers sell it at a large markup; your own insurer or credit union is usually much cheaper for the same cover.

Should I take the 0% financing or the cash rebate?

Run both. Manufacturers usually offer one or the other, and 0% financing is not free if it means giving up a $2,500 rebate. Work out the payment at 0% on the full price, then the payment on the reduced price at the rate you would get from a bank or credit union, and compare the totals. On shorter terms the rebate frequently wins; on longer ones the free financing usually does. The calculator above prices either scenario — just change the price and rate.