How to Calculate Interest Rate on a Car Loan

car salesman assisting woman in vehicle

Maybe you’ve recently applied for an automotive loan in Roseville. Maybe you’re trying to get approved for a new car loan in Sacramento but you want to learn more about loans in general. Either way, our finance experts here at Sacramento Chrysler Dodge Jeep Ram can help explain the important aspects of a car loan to you and even help you calculate the interest on a car loan. If you have any questions along the way, just contact us and we’ll be more than happy to help you learn the various aspects of how car financing works!

What is an Auto Loan Interest Rate?

When trying to figure out how to calculate the interest rate on a car loan, first, you’ll need to know what exactly interest is what determines an interest rate.

If you choose to finance the cost of buying a car instead of paying cash outright, the lender who holds your loan owns your vehicle until it is paid off. You can think of a car loan interest rate as a fee you pay the lender to use their money to buy your car. 

How much you wind up paying for an interest rate is based on a variety of factors, including:

  • Loan Term: The loan term is defined as the period of time you have to pay off your loan. Shorter loan terms usually entail higher monthly payments since the vehicle price is spread out over less time, but in the long run, often wind up being cheaper since they often offer lower interest rates. Longer loan terms offer lower monthly payments, but often offer higher interest rates. Some car buyers opt for a longer loan and pay it off sooner by paying more on months they can.
  • Principal Amount: The principal amount is the amount of money you borrow without interest added on. 
  • Repayment Amount: For every monthly car loan repayment, a portion pays off the interest and a portion goes to repay the principal. 
  • Repayment Schedule: Thanks to compounding, if you pay off your vehicle faster than the loan term, you’ll usually pay less in interest. However, this logic runs counterintuitive to the reason most people finance a car: affordability. Still, paying off a vehicle early, when possible, can make good financial sense.

How to Calculate Interest Amount for the First Car Payment

If you’re deciding how to calculate your car loan interest for the initial payment only, just use this easy calculation:

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

This calculation should result in a numerical figure for the interest amount you’ll pay on your first car payment!

How to Figure Interest Amount on a Car Loan After Month 1

Once you have begun to pay down your initial principal you will need to calculate your new balance to configure the interest you’ll pay going forwards. Here’s the calculation to follow for that amount:

  1. Use the interest amount you calculated above for the first month from the payment you just made and this will leave you with the amount that you have paid off the loan principal thus far.
  2. Deduct this total from your original principal to get your new loan balance. 

While rounding and human err may impact the total you calculate, the above processes should give you a good means of how to calculate the interest rate on a car loan. 

Learn More About Car Loans with Sacramento Chrysler Dodge Jeep Ram

Here at the Sacramento Chrysler Dodge Jeep Ram finance center, we can answer all your questions about car loans and leases, as well as how to get a car ready to sell. Looking for more basic information on how your interest rate will impact your monthly car loan payment? Just explore our online monthly payment calculator. For anything else, feel free to give us a call at (916) 229-8912!

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