How to Calculate Interest Rate on a Car Loan

What is an Interest Rate?

The term interest rate is something you will hear while shopping around the San Marcos and Carlsbad areas for a MINI vehicle. An auto loan means that you make monthly car payments until it’s paid off. During this time, the dealership – or bank if you go that route – still owns the vehicle. When you make monthly payments, it includes the interest rate – or a fee for using their money to buy the car. Interest rates will vary by lender, and they also depend on a variety of factors:

• The principal amount is the dollar amount you need to borrow.
• The loan term is the length of time you need to pay back the loan. Keep in mind, shorter loan terms mean higher monthly payments, but you’re paying less in interest. With longer terms, you will have lower monthly payments, but you will pay more in interest in the long run.
• The repayment schedule is often monthly with car payments, but you can make more than one payment a month.
• The repayment amount is how much you’re paying in total. With each payment, a portion goes to interest, and a portion goes to repay the principal amount.

How to Calculate Auto Loan Interest for First Payment

If you want to learn how to figure interest on a car loan for the first payment, here is a quick calculation:

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.

How to Figure Interest on a Car Loan Going Forward

You probably want to know how to calculate auto loan interest for more than just the first month. After paying down some of your initial principal, there’s a way to calculate your new balance to work out the interest in the coming months. Here is how to do that:

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.

Remember, human error happens, and you may not get the same number each time. However, you will at least have a good idea after learning how to calculate the interest on a car loan.

Need Additional Help? Contact MINI of Escondido!

Learning how to calculate the interest rate on a car loan can seem daunting for many car buyers, and that’s okay. We’re here to help! Our team will walk you through how to calculate auto loan interest, help you get an estimate on your monthly payments, and answer any questions you have along the way. Give us a call at your earliest convenience to get started.