How to Calculate the Interest Rate on a Car Loan

woman looks at finance documents

When you take out a car loan, you can expect to pay interest on the loan each month. Because of this, you may be wondering how to figure interest on a car loan into your monthly budget. Allen Samuels Auto Group will show you how to calculate the interest rate on a car loan, so you can have a better idea of what you can afford.

What is an Interest Rate?

When looking at how to figure interest on a car loan, the first thing you need to know is what an interest rate actually is. If you purchase a car on credit, your lender owns your vehicle until it is paid off. The interest rate you pay is basically a fee you pay the lender for using their money to purchase your vehicle. There are a few factors that come into play when your interest rate is determined.

  • Principal Amount: The principal amount is the amount you plan on borrowing.
  • Loan Term: This is how long it will take you to repay the loan in full. Usually, if your loan terms are shorter, you are paying more each month. However, because you are borrowing the money for less time, you will pay less in interest. If your loan term is longer, you will have more affordable monthly payments, but you will be charged more in interest.
  • Repayment Schedule: Most car payments are done monthly, but more frequent payments could save you money in the long run. Thanks to compounding, when you make more payments you pay less interest.
  • Repayment Amount: Each time you make a payment on your car loan, some of the money is put toward your principal, and the rest is interest.

How to Calculate Auto Loan Interest for First Payment

This formula will show you how to calculate auto loan interest for the initial payment you have to make.

  1. Divide your interest rate by the number of monthly payments you will be making this year.
  2. Multiply it by the balance of your loan, which for the first payment, will be your whole principal amount.

That is all you need to do to determine the amount of interest you pay for the first month.

How to Figure Interest on a Car Loan for Future Payments

As you begin to pay down the initial principal, you need to recalculate the balance to calculate future interest payments:

  1. Subtract the interest you just calculated from the payment you just made and this will leave you with the amount that you have paid off the loan principal.
  2. Deduct this total from your original principal to get your new loan balance.

This won’t give you an exact calculation each time, but it should give you a good general idea of how to calculate the interest rate on a car loan going forward.

couple buys car

Allen Samuels Auto Group is Here to Help

If you still have questions on how to calculate interest on a car loan or you would like to know more about automotive financing, you can always reach out to the team at Allen Samuels Auto Group. We also have information on paying your loan off early.

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