How to Calculate the Interest Rate on a Car Loan

Considering financing a new Chevy or one of our pre-owned cars in our inventory? When you’re taking out a loan for a car in Livonia, 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? Learn how to calculate interest rate on a car loan below. 

What is an Interest Rate?

Let’s start by figuring out what interest is and what factors impact it. If you purchase a car on credit in Canton, 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 car. 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

When figuring out how to calculate auto loan interest for the initial payment, do the following: 

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 paid your initial principal, you will 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 idea on how to calculate the interest rate on a car loan, so you can take better control of your finances in Plymouth. 

Learn More About Car Financing from Gordon Chevrolet, Inc.

Now that you know what goes into determining the interest rate for an auto loan, find out what credit score you need to finance a vehicle or how paying off a car loan early works. If you’d like to get in touch with us, give us a call today.