How to Calculate the Interest Rate on a Car Loan

Is your current vehicle no longer up to your standards? Are you shopping for a new or new-to-you car, truck, or SUV? You’ve come to the right place. Price and your monthly payment are probably your most important considerations when buying a new or used vehicle. The interest rate you get for an auto loan is one factor in your monthly payment. Wondering how to calculate interest on a car loan? We can help with our handy guide from our finance team. 

What Is an Interest Rate?

The interest rate determines how much you pay the lender for using their money to purchase your vehicle near Bloomington. It’s the fees you pay to the lender for the privilege of using the lender’s money to purchase your vehicle.

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

• Principal Amount: The principal amount is the dollar amount you want to borrow. This is the final amount you pay for your vehicle after you lower the price with a down payment and/or trading in your current vehicle.
• 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. Loan terms typically run from as short as 12 months to as long as 84 months, depending on the lender.
• 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 when putting those extra payments towards the principal of the loan. 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 and lower your overall costs of ownership.
• 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. You can pay off your auto loan at any time. Start this process by requesting the payoff amount from your lender.

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: 

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.

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

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. 

You can always contact your lender to find out exactly how much you will owe the next month.

Call Us With Questions About Auto Loan Interest

Still have questions about interest on an auto loan? Contact us or call (309) 321-0093 to talk to our finance center. We can walk you through every aspect of how to calculate the interest rate on a car at Ray Dennison Buick GMC. We’re happy to help in any way we can! We’d love to put a new or new-to-you vehicle in your Peoria or Morton garage!