Car sales tax can normally be included in the total loan amount taken when buying a new or used car. This is helpful for consumers who prefer to put no money down when financing a vehicle. However, a consumer's credit history, the total amount financed and even the type of vehicle can impact the lender's decision when it comes to financing car sales tax.
The most important factor when it comes to financing sales tax on a new or used car purchase is personal credit history. Consumers with poor credit histories and those financing a large amount of negative equity from a previous vehicle may need to put their sales tax down on the purchase of a vehicle. In many cases, a down payment even larger than the sales tax amount is required. For some car buyers, it can even be impossible to secure financing with a down payment of any amount.
Total Amount Financed
The loan-to-value rating of a car loan has a large bearing on whether or not sales tax can be financed. For example, if a car is valued at $15,000 but, because of negative equity being rolled over from your previous auto loan, you look to finance $19,000, your loan-to-value would equal 127 percent, meaning you are looking to borrow 127 percent the value of the collateral. Few lenders consider advancing such a large amount, because it means you will be a very poor equity position and have higher payments, which renders your loan a higher risk.
Type of Vehicle Financed
Some vehicles have very low book values for a range of reasons. For example, a Pontiac would have a lower book value than a Chevrolet for the simple fact that the Pontiac brand is no longer in production, so the strength of the mark is diminished. Therefore, a Pontiac G6 may have a loan value of $10,000 while a comparable Chevrolet model has a value of $12,000. This means that for like vehicles priced at $13,000, the loan-to-value amounts are vastly different. It could be difficult to secure financing on the Pontiac without putting sales tax down, while securing a full-value loan for the Chevrolet would be easier.
Making the Right Financial Decision
Electing to finance sales tax in your new or used car purchase means that you must pay interest on the sales tax amount. In the grand scheme of things, financing sales tax could raise your payment significantly, and the total cost of borrowing money would be higher because of the interest paid on sales tax. Paying your tax upfront makes the most financial sense, unless a 0 percent APR offer is currently available from the manufacturer. If you can borrow money for the taxes without paying interest on the loan it becomes a moot point.