How to Calculate the Interest Rate on a Car Loan

Hands Doing Calculations with Calculator

Most of the time you take out a loan for a new or used vehicle around Lake Havasu City, you will have to pay interest. Many Lake Havasu City drivers ask our finance team how to calculate the interest rate on a car. Here we go over how to calculate the interest rate on a car loan, and if you have any questions, reach out to us. We’re always happy to help!

Interest Rate Basics

If you want to know how to figure interest on a car loan, you’re in the right place. First, let’s make sure you understand what interest is and the things that influence it. When you purchase a new car on credit, your lender still owns your vehicle until you pay it off. The interest rate is the fee you pay the lender for using their money to purchase your new car. Your interest is based on several factors, such as:

  • Principal Amount: The principal amount is the dollar amount you need to borrow. 
  • Loan Term: This loan term is the length of time you agree on to repay the loan. Shorter loan terms mean you’ll make higher payments, but you’ll pay less interest in the long run. With a longer-term auto loan, you typically have lower monthly payments, but pay more interest in the long run. 
  • Repayment Schedule: Most car payments are made monthly, but if you can make payments more often, it will save you money in the long term. 
  • Repayment Amount: With every monthly car loan payment, a portion goes to interest, and the rest goes to repay your principal. 

How to Calculate Auto Loan Interest for Your First Payment

When figuring out how to calculate auto loan interest for the first loan payment, use this quick calculation: 

  1. Divide the interest rate by the number of monthly payments left in this year. 
  2. Multiply that number by the balance of your loan. For the first payment, that will be your whole principal amount.

The final number gives you the amount of interest you’ll pay the first month.

How to Figure Interest on a Car Loan Going Forward

When you begin paying down your initial principal, you’ll need to calculate your new balance to figure out the interest you’ll pay in the following months. This is the process for how to calculate interest on a car for the rest of the year::

  1. Subtract the interest you just calculated above from the first payment you just made, and this leaves you with the amount that you have paid off the loan principal.
  2. Deduct this amount from your original principal, and you get your new loan balance. 

You may not have a precise calculation every time, but it’s a sound basis for how to calculate the interest rate on a car loan. 

Get Help From the Financial Team at Anderson Auto Group

If all this seems a bit overwhelming, you’re not alone. The finance experts at our Finance Center near Bullhead City and Kingman are happy to show you how to calculate interest on a car, or do it for you. You can also use our monthly payment calculator to estimate your car payment. We look forward to serving you!

 

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