How to Calculate the Interest Rate on a Car Loan

When you take out an auto loan around Los Banos, you will be charged interest, but how much does your interest rate impact your monthly payments? In the following guide, Merced AR explores how to calculate an interest rate on a car loan. Learn more below, and call us at 209-267-2865 or reach out online for more information.

What is an Interest Rate?

So, how to calculate your interest rate on a car loan? Before determining how to figure out your interest on a car loan, we need to discuss what interest is and what impacts it. When you buy a car on credit, your lender owns your vehicle until it’s paid off. The interest rate you pay is a fee you pay the lender for using their money to purchase your vehicle. What interest you end up paying is based on multiple factors, including:

• Principal Amount: This is the dollar amount you are looking to borrow.
• Loan Term: This term means the length of time you will be repaying your loan. In general, shorter loan terms equal higher repayments, but less interest paid in the long run. With longer terms, you have lower monthly payments but end up paying more in the long run. 
• Repayment Schedule: Most car payments are done monthly, but if you make payments more often, it can save you money over time. Thanks to compounding, when you make more payments you pay less interest.
• Repayment Amount: With every car loan payment made, a portion goes to interest and a portion goes to repay your principal.

How to Calculate Auto Loan Interest for First Payment

When you’re figuring out how to calculate auto loan interest for your initial payment, you should use this quick calculation: 

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

This provides you with the amount of interest you will pay the first month.

How to Figure Interest on a Car Loan Going Forward

Once you’ve started paying down your initial principal, you will need to know how to figure interest on a car loan over the following months. To do this:

1. Subtract the interest you’ve calculated from the payment you made and this leaves you with the amount that you have paid off your 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 on how to calculate the interest rate on a car loan. Our team is here to help you determine exactly how much you can afford while upgrading your Atwater commutes!

Get Help From the Financial Professionals at Merced AR

Now that you know how to calculate the interest rate on a car, Merced AR is the place for answering all your finance questions. We can walk you through all things car finance, including how to improve your credit score and whether you can finance with no credit. Get your car financed near Merced with Merced AR!