How to Calculate the Interest Rate on a Car Loan

Interest Rate

 

Whenever you take out a loan, whether it’s for a car, home, boat, or personal finances in Lima, you are going to be charged interest. You might wonder how much your interest rate ends up impacting your monthly payments and the total amount owed over the term of the loan.

 

 

Discover more as we go over how to calculate the interest rate on a car loan, courtesy of Exceptional Motorcar.

What Is an Interest Rate?

When determining how to figure interest on a car loan, we’ll go over what interest is, the factors that impact it, and what it means to your overall cost to purchase a vehicle. If you purchase a vehicle with an auto loan, your lender owns the vehicle until you pay it off by fulfilling the terms of the loan. The interest rate determines how much you pay the lender for using their money to purchase your vehicle near Toledo.

What interest rate you end up paying your lender is based on a variety of factors, including:

  • Principal Amount: The principal amount is the dollar amount you want to borrow.
  • Loan Term: This term means the length of time you will be repaying the loan. In general, shorter loan terms mean higher monthly payments but lower interest paid in the long run. With longer terms on the loan, you generally have lower monthly payments, but end up paying more interest in the long run. How to calculate the interest rate on a car starts with the terms of the loan you agree to.
  • Repayment Schedule: Most car payments are done monthly, but if you can make payments more often it could save you money on interest over time. That’s because interest is compounded. When you owe more money during one month versus another, you owe more interest until you pay down more of the principal of the loan. Then, the overall interest you owe will decrease.
  • Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to repay your principal. You can see the itemized list of where your monthly payment goes. Let’s say your first monthly payment is $400. Because your loan is new, you might pay $300 in interest and $100 in principal. By month 12, your interest/principal ratio might go to $250/$150, and so on. Your actual results may vary.

How to Calculate Auto Loan Interest for the First Payment

When figuring out how to calculate auto loan interest for the initial payment you can use this quick calculation for Findlay drivers:

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

This gives you the amount of interest you pay the first month.

How to Figure Interest on a Car Loan Going Forward

Once you have started to pay down your principal, calculate your new balance to work out the interest you pay in the following months.

Use this method:

  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.

While human error and number rounding mean you won’t have an exact calculation every time, this gives you a good basis for how to calculate the interest rate on a car loan.

Test Drive a Used Vehicle at Exceptional Motorcar

Buying a car is a big step! We understand if the financing seems a bit overwhelming. Contact us or call (419) 782-0607 to talk to ourFinance Center. We can walk you through every aspect of how to calculate interest on a car at Exceptional Motorcar.

For even more assistance, apply for financing and look over our car-buying tips. We’re happy to help you in any way we can!

 

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