How to Calculate the Interest Rate on a Car Loan

Closeup of man signing a contract of car sale.

Knowing how to calculate the interest rate on a car loan will help you make a budget-friendly new vehicle purchase in Bloomington, Morton, Peoria. Interest rates can dramatically affect your ongoing monthly payments and total amount owed, so let’s lean on our finance team’s insight on how to figure interest on a car loan.

What is an Interest Rate?

When learning how to calculate auto loan interest, you’ll first need to understand how car financing works, including what is an interest rate and how it impacts your payments. Taking out an auto loan means you’re purchasing on credit, borrowing money from a lender. The interest rate is a monthly fee paid for using the lender’s money. Your interest rate will be determined by several factors: 

  • Principal Amount: The total dollar amount you are looking to borrow. 
  • Loan Term: The length of time you will be repaying the loan. In general, shorter loan terms equal higher monthly payments, but less interest paid in the long run. With longer terms, you generally have lower monthly payments, but end up paying more total. 
  • Repayment Schedule: While most drivers make monthly payments, paying more frequently could save you money over time, since you will be making larger dents into the total owed at a quicker rate. 
  • Repayment Amount: Every payment is divided between your principal (the total borrowed) and the interest. 
  • Credit Score: Your score will play a big role in determining whether you get a good interest rate

How to Calculate Auto Loan Interest for First Payment

Setting your new car purchase budget isn’t just about the sticker price in : you’ll need to factor in your interest rate as well. Here’s how to calculate auto loan interest for your first payment:

  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.
  3. This gives you the amount of interest you pay the first month.

You can also use a monthly payment calculator to give you a good idea of how much you’ll be paying. 

How to Figure Interest on a Car Loan Going Forward

The more you pay down your initial principal, the less you’ll be paying toward interest. To figure interest on your car loan over time, simply: 

  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. 

This method may not give you an exact amount down to the dollar, but it will still give you a good picture of what to expect moving forward. If you’re still not sure how to calculate the interest rate on a car loan, or want a definite number, contact our friendly finance team for more help. 

Get Help From the Financial Professionals at Sam Leman Automotive Group

For more help on how to calculate auto loan interest, work with the pros at Sam Leman Automotive Group! We know that financing can feel overwhelming to most drivers, which is why we offer not only general car buying tips, but also personalized guidance on your new car purchase. Our team can answer all your questions and help you make a savvy decision. Contact us to get started!