Car Financing: Calculations & Tax Offsets
Purchasing a vehicle is often the second largest transaction a household makes. Understanding the total financial obligation requires looking beyond the monthly payment, integrating sales tax structures, trade-in calculations, and loan amortizations.
Loan Payment Formula
The monthly payment (M) of an amortizing car loan is determined as:
where:
- P = Net amount financed (purchase price + fees + tax + negative equity - down payment - trade-in value)
- r = Monthly interest rate (annual interest rate / 12 / 100)
- N = Total months in loan term (e.g., 60)
Calculating Net Loan Balance
To calculate the exact amount you need to borrow, the calculator uses the following structure:
1. **Net Purchase Price**: Vehicle Price - Trade-in Value (if tax credit applies).
2. **Sales Tax**: Net Purchase Price × Sales Tax Rate.
3. **Net Amount Financed ($P$)**: Vehicle Price - Down Payment - Trade-in Value + Amount Owed on Trade-in + Sales Tax + Dealer Fees.