How to Calculate the Interest Rate on a Car Loan

Whenever you take out a car loan for your Prescott ride, you’ll be charged interest. How much does your interest rate end up impacting your monthly payments and the amount you eventually pay? Find out with Red Wing Chevrolet as we explore how to calculate the interest rate on a car loan below, then contact our finance department for more information!

What is an Interest Rate?

The first thing to consider when learning how to calculate the interest rate on a car loan is what interest is, as well as the factors impacting it. While you can purchase a car in cash, few in Zumbrota have that kind of money in their bank accounts—meaning that most drivers purchase their car on credit. In this scenario, your lender purchases the car on your behalf and technically owns the car until you pay them their money back. Your lender charges a fee for this service, called interest. Interest is calculated from a variety of factors:

• Principal amount: The principal is the amount you borrow from the lender or the car’s purchase price.
• Loan term: How long it will take you to repay the loan? In general, a shorter loan term means you’ll have higher monthly payments but pay less overall. With a longer-term loan, you’ll have lower monthly payments but end up paying more when all is said and done.
• Repayment schedule: While most car payments are made on a monthly basis, you can make payments more often to save money over time. The more payments you make on your loan, the less interest you’ll end up paying overall.
• Repayment amount: This is the total amount—principal plus interest—that you pay to the lender over time. With every loan payment you make, a portion goes to accrued interest and a portion goes toward the principal.

How to Calculate Interest Rate on a Car

Want to learn how to calculate interest rate on a car loan? It’s a pretty quick calculation:

1. Divide your interest rate by the number of monthly payments you will be making this year.
2. Multiply that number 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’ll pay in the first month of your car loan.

How to Figure Interest on a Car Loan Going Forward

After the first month, learning how to figure interest on a car loan is a little more complex. Since you’re paying down your initial principal, you’ll need to calculate your new balance to work out how much interest you’ll pay going forward. Follow these steps to calculate your new Cannon Falls loan balance, then use the steps above to figure out your interest payment for the month:

1. Subtract the interest you just calculated from the payment you just made. 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 this might not give you exactly the amount you’ll owe each month, it’ll give you a good basis to budget against. You can always use our online monthly payment calculator for a more precise amount!

Learn More About How to Calculate Auto Loan Interest

Above, we outlined how to calculate the interest rate on your car loan, but you don’t have to do it alone! Feel free to contact the experts at our Red Wing finance center with any questions you have about financing a new car, interest rates, and more. At Red Wing Chevrolet, we’re here to help you make the most out of your car loan!