How to Calculate the Interest Rate on a Car Loan

As many as 80% of Americans take out an auto loan as a way to purchase a new or used vehicle. There are several factors that go into getting an auto loan and calculating your monthly payment. One of these factors is the interest rate. In general, the better your credit score the lower the interest rate you could get. 

Do you want to know how to calculate auto loan interest? It can help you become a more informed shopper and give you some insights into auto loan financing. Knowing how to figure interest on a car loan can also help you down the road when applying for financing for your next vehicle. 

Read on to learn how to calculate the interest rate on a car loan from the experts at Liberty GMC, Inc. We’d love to see you drive home with a new or new-to-you vehicle to Phoenix.

How to Calculate Interest Rate on a Car: What Is an Interest Rate?

When looking at how to figure interest on a car loan, you’ll need to understand what interest is and how it works with lending institutions. If you purchase a car with a loan from a bank, your lender owns your vehicle until you pay it off. The interest rate determines how much overall interest you pay on the loan. A lower interest rate means you pay less overall interest, while a higher interest rate means you pay more interest. 

Obviously, you want a lower interest rate because when you discover how to calculate the interest rate on a car loan, you’ll pay less money to the bank.

Interest is essentially the 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. Look these over when learning how to figure interest on a car loan.

How to Calculate Interest Rate on a Car With These Four Factors

• 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 make for your Tempe drives, look over this two-step formula:

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

The result shows you the amount of interest you’ll pay the first month.

How to Calculate the Interest Rate on a Car: Interest You’ll Owe Going Forward

As the principal goes down, you can calculate your new balance to work out the interest you pay in the following months. 

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. 

Auto Loan Experts at Liberty GMC, Inc.

Ready to explore car ownership? Our finance center is here to help! Contact us or call (602) 714-3106 to talk to us about auto loan financing.