How to Calculate the Interest Rate on a Car Loan

When you take out a loan for a new vehicle in Indianapolis, you’re going to be charged interest. That being said, how much does your interest rate end up influencing your payment? We’re about to tell you everything we know about how to calculate the interest rate on a car loan. Learning how to calculate auto loan interest is easy, even if math wasn’t your subject in school. Lafayette Cadillac is the team of automotive experts ready to help you figure it all out!

What is an Interest Rate?

Looking at how to calculate the interest rate on a car first requires we understand what interest is and the factors that impact it. If you purchase a car on credit, your lender owns the vehicle until you pay it off. The interest rate is, in essence, a fee paid for the right to use someone else’s money to bring your car home to Frankfort or Delphi. Understanding how to figure interest on a car loan requires you to know the following terms:

• Principal Amount: This is the dollar amount you’re looking to borrow.
• Loan Term: This is the length of time you’ll be repaying the loan. In determining how to calculate the interest rate on a car loan, you should know that shorter term = higher monthly payment but less overall interest paid, while longer-term = lower monthly payment but more overall interest paid.
• Repayment Schedule: You’ll pay off your loan monthly in most cases, but making more payments ahead of schedule saves you money. This is because compound interest accrues with the passage of time.
• 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 you determine how to figure interest on a car loan for the initial payment, this is what you do:

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.

It’s as simple as that to determine your first month’s car payment.

How to Figure Interest on a Car Loan Going Forward

Once you start paying the principal, you need to determine your interest at that particular point in time. This is how to calculate the interest rate on a car loan going forward:

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. 

The Finance Pros at Lafayette Cadillac Have Your Back

The payment calculator is a simple way to determine your monthly payment. It’s just one of many tools Lafayette Cadillac has that can answer all your questions, including how to calculate auto loan interest. Our finance team can also teach you how to figure interest on a car