Financing a car that loses value while you pay
A car loan is the same arithmetic as any other amortising loan, with one difference that matters: the asset securing it depreciates faster than the balance falls for the first few years.
The formula
Worked example: $30,000 at 6% over 5 years
- Monthly payment: $579.98
- Total interest: $4,799
- Total paid: $34,799
The interest adds 16% to the price of the car. On a five-year term at 6% that is the cost of not paying cash.
Negative equity, in numbers
A new car typically loses 20% in year one and about 15% a year after. Compare that against the loan balance:
| End of year | Car worth | Loan balance | Position |
|---|---|---|---|
| 1 | $24,000 | $24,700 | −$700 |
| 2 | $20,400 | $19,100 | +$1,300 |
| 3 | $17,340 | $13,150 | +$4,190 |
With no deposit you are underwater for roughly the first eighteen months. Crash the car in that window and the insurance payout — which covers market value, not the loan — leaves you owing the difference. That is what gap insurance exists to cover.
What a longer term really costs
Seven-year car loans are now common because they lower the monthly figure. On the same $30,000 at 6%, seven years gives $438 a month instead of $580 — but total interest rises from $4,799 to $6,782, and you are underwater for around three years instead of eighteen months.
What this calculator leaves out
Sales tax, registration, dealer fees, and the extended warranty usually offered at signing. These are frequently rolled into the loan, which raises the balance above the car's value from day one.
Also the manufacturer subsidised rate: 0% finance on a car with no discount often costs more than a bank loan on a discounted one. Compare the total paid, not the rate.
The deposit does more than lower the payment
A 20% deposit on the $30,000 example reduces the loan to $24,000 and the payment to $464. It also removes the negative equity window entirely — the balance stays below the car's value from month one.
Total interest falls from $4,799 to $3,839. The deposit buys $960 of saved interest and, more importantly, the freedom to sell the car at any point without writing a cheque to close the loan.
Dealer finance against a bank loan
Arrange the loan before visiting the dealer and you separate two negotiations that dealers prefer to merge. With financing in hand, the conversation is only about the price of the car.
Where dealer finance genuinely wins is a manufacturer subsidy — a real 0% or 1.9% offer. Where it usually loses is a marked-up rate: the dealer is paid a margin on the rate you accept, and a quarter point on a five-year loan is worth more to them than a haggle over floor mats.
Related calculators
- Car affordability calculator — works backwards from a monthly budget
- Depreciation calculator — what the car is worth each year
- Refinance calculator — whether a better rate is available now