How to Calculate the Interest Rate on a Car Loan

What is an Interest Rate?

When looking at how to figure interest on a car loan, we first need to touch on what interest is and the factors that impact it. If you purchase a car on credit, 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. Thanks to 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

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 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 initial principal you need to calculate your new balance to work out the interest you pay in the following months. To do this:

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. 

Get Help From the Financial Professionals at United Ford

If this seems a little overwhelming, or you have additional financing questions, the experts at our Secaucus finance center are here for you. They can walk you through every aspect of how to calculate interest on a car at United Ford. If you are looking for some basic information on how your interest rate will impact your monthly car loan payment, you can also check out our online monthly payment calculator or our value your trade calculator.