How to Calculate the Interest Rate on a Car Loan

With any car loan you take out in Milton, you are going to be charged interest. You may be wondering how that interest rate may end up impacting your overall monthly payments and the total amount owed. The finance experts at Sandy Sansing offer car buying tips and will work to help you learn how to figure interest on a car loan so you can set your budget like a pro.

What is an Interest Rate?

When attempting to learn how to calculate interest rate on a car loan, the first step is to touch on the factors that impact interest. If you purchased your car via an auto loan, the lender owns the car until the vehicle is paid off. The interest rate is essentially the fee you pay for using the lender’s money to buy your car in the first place. So, before you learn how to calculate interest rate on a car, let’s discuss the following factors:

  • Principal Amount: This is the total amount you are borrowing to pay for your car.
  • Loan Term: This refers to the length of time you will be taking to repay the loan. In most cases, shorter loan terms result in higher monthly payments but lower interest amounts. Longer-term loan agreements can be more affordable on a monthly basis, but will require heavier interest payments in the long run. 
  • Repayment Schedule: In most cases, car payments are made on a month-to-month basis. However, if you can make more frequent payments, you can save money on interest overall. Due to compounding, when you make more payments, you pay less interest. 
  • Repayment Amount: Each car payment will be segmented out, with a portion going towards the principal of the loan and another to paying off interest. 

All of these factors weigh heavily on interest and your car bill on a monthly basis. Continue reading below to understand how these factors come together when you attempt to learn how to figure interest on a car loan. 

How to Calculate Auto Loan Interest for First Payment

As you begin to learn how to calculate auto loan interest, you will notice that you need to calculate differently for the first payment vs. the subsequent payments. Follow these steps to learn how to calculate interest rate on a car on your first payment:

  1. Start by dividing the interest rate on your loan by the number of monthly payments you will be making this year. 
  2. Multiply this number by the balance of your loan, which will be the whole loan amount for the first payment. 

This figure will give you the amount of interest to be paid on your first payment. 

How to Figure Interest on a Car Loan Going Forward

Once you have begun making payments, you need to calculate your new balance to work out what to pay in the following months. Follow these steps to find that figure:

  1. Subtract the interest calculated from the first payment made. This will leave you with the total you have paid off of the principal loan balance. 
  2. Deduct this figure from the original loan amount to discover your new loan balance

This formula gives you a good idea of how to calculate interest rate on a car loan. Keep in mind, that your numbers may not be exact due to inaccurate rounding or human error.

Get Help From the Financial Professionals at Sandy Sansing

If learning how to calculate auto loan interest seems overwhelming, turn to the finance pros here at Sandy Sansing. Not only can we help you figure out how to calculate interest rate on a car, but we can also help you secure the most favorable deal on a new or used vehicle to enhance your Cantonment commutes. You can also utilize our monthly payment calculator to get a better idea of what your budget will look like. Turn to Sandy Sansing in Pensacola for all things auto and contact us to learn more about the services we provide. 

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