How to Calculate the Interest Rate on a Car Loan

car loan calculator

If you take out a car loan in the Lakewood Ranch area, you’ll automatically be charged interest, but how much will that interest rate impact your total amount owed and monthly payments? Wilde Lexus Sarasota can answer this question by showing you how to calculate auto loan interest with our expert financial team. 

What is an Interest Rate?

Before we look at how to figure interest on a car loan, let’s first identify the factors that impact interest and what interest truly is. If you were to purchase a new or used vehicle on credit, your lender owns your car until it’s completely paid off. Your interest rate is essentially the fee you pay to the lender for using their money to buy your car. The interest rate is based on various factors, including:

  • Principal Amount: Principal amount is considered to be the amount of money you’re looking to borrow. 
  • Loan Term: Loan term refers to the length of time it’ll take for you to repay that loan. Usually, shorter loan terms mean high repayments, but less interest would be paid overall. However, you’ll end up paying more over time with longer terms even though the monthly payment is usually lower. 
  • Repayment Schedule: Even though your car payments are paid monthly, if you’re capable of making payments more often, you could save money over time. Due to the ability to compound, when you make more payments, you’ll end up paying less interest. 
  • Repayment Amount: For every car loan payment, part of it will go to repaying your principal and the other part goes to interest.

How to Calculate Auto Loan Interest for First Payment

Use this quick calculation to figure out how to calculate auto loan interest for your initial payment: 

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

The number calculated will be the amount of interest you pay for your first month.

How to Figure Interest on a Car Loan Going Forward

As soon as you start paying down your initial principal, you’ll have to calculate the new balance to figure out the amount of interest you’ll pay in the upcoming months. How to do this: 

  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. 

Even though you won’t have the exact calculations every time, due to number rounding and simple human error, this provides you with a fair basis for how to calculate auto loan interest. 

Get Help from the Financial Professionals at Wilde Lexus Sarasota

Still not sure how to calculate interest rate on a car? Feel free to contact us to reach our exceptional Finance Department at the Wilde Lexus Sarasota near Venice to help you with any difficulties. Our staff is ready to walk you through this process so you don’t feel overwhelmed! If you need additional information on how your monthly car loan payment can be impacted by your interest rate, use our monthly payment calculator to find out.

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