How to Calculate the Interest Rate on a Car Loan

Are you considering financing a new car in Cincinnati, OH? When you take out an auto loan, you are going to be charged interest. But just how much does your interest rate end up impacting your monthly payments and total amount owed? If you’re trying to understand how the amount is determined, then keep on reading to learn how to calculate interest rate on a car below. 

What is an Interest Rate?

But first things first: what is interest and what are the factors that impact it? When you purchase a car on credit in Covington, 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. 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 are looking to borrow. 
• Loan Term: This term means the length of time you will be repaying the loan. In general, shorter loan terms equal higher repayments, but less interest paid in the long run. With longer terms, you generally have lower monthly payments, but end up paying more in the long run. 
• Repayment Schedule: Most car payments are done monthly, but if you can make payments more often it could save you money over time. Because of compounding, when you make more payments, you pay less interest. 
• Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to repay your principal. 

How to Calculate Auto Loan Interest for First Payment

How do you calculate the auto loan interest for the initial payment? Use this quick calculation: 

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 Out Interest on a Car Loan Going Forward

Once you have started to pay down your initial principal, you need to calculate your new balance to work out the interest you pay in the following months. Follow these steps to do that: 

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. 

Human error and number rounding might mean you won’t have an exact calculation every time. However, this gives you a good basis for how to calculate the interest rate on a car loan, so you can take control of your finances in Independence. 

Learn More from Tom Gill Chevrolet 

Now you know how to calculate the interest rate on a car loan. Feel free to explore other related topics, such as what happens if you can’t make your car payments and what is the process with financing with bad credit. Our finance specialists have all the information you need when financing a vehicle in the Florence area!