How Trade-Ins Affect Your Monthly Car Payment (and Sales Tax)

When you walk into a car dealership, the salesperson will inevitably ask you the most dangerous question in the automotive industry: "What do you want your monthly payment to be?"

If you answer that question, they will easily manipulate the loan term (extending it from 60 to 72 or even 84 months) to get you that exact monthly payment, while charging you thousands of extra dollars in interest.

To negotiate effectively, you need to know exactly how much a car will cost you per month before you step on the lot.

The Four Factors of a Car Loan

Your monthly payment is determined by four things:

1. Principal: The total amount you are borrowing.
2. Interest Rate (APR): The cost of borrowing that money.
3. Loan Term: How many months you have to pay it back.
4. Sales Tax: State taxes applied to the purchase price.

The Secret Benefit of Trade-Ins

Did you know that in most U.S. states, trading in your old car actually saves you money on taxes?

If you buy a $35,000 car, but you trade in your old car for $5,000, you are only taxed on the difference ($30,000). If your state has a 7% sales tax, that trade-in just saved you an additional $350 in pure taxes!

Note: California, Michigan, and a few other states do not offer this trade-in tax deduction.

Run the Numbers Before You Buy

Never go into a dealership blind. Use our free Car Payment Calculator.

Enter the sticker price of the car, your expected down payment, your trade-in value, and your interest rate. We will instantly calculate your estimated monthly payment and show you exactly how much you'll end up paying in interest over the life of the loan.