How to Calculate Interest Rate on a Car Loan

Taking out a loan when you buy a vehicle will always involve paying interest. But how to figure interest on a car loan in Mesa? That’s the real question. Your interest rate impacts your monthly payment, and your total amount owed. So it’s important to carefully consider how to calculate interest rate on a car. Cactus Jack's Auto has the answers, just talk to the GM.

What Does Interest Rate Mean?

How to calculate auto loan interest first depends on what interest is and how its value affects your purchase. Technically speaking, if you take out a loan your creditor owns the car, truck, van, or SUV until the loan is paid. The interest you pay is the fee the lender charges you to use their funds. How to calculate auto loan interest around Surprise is based on a number of criteria, including:

• Principal Amount – The total amount of cash you borrow

• Loan Term – The length of time you will take to zero the balance

• Repayment Schedule – How often you make payments, and how large they are

• Repayment Amount – The total owed between both principal and interest

In general, shorter loan terms equal higher repayments, but less interest paid in the long run. With longer terms, you generally have lower monthly payments, but end up paying more in the long run. Each month, your payment covers a certain portion of the principal and a certain portion of the interest.

Calculating First-Payment Auto Loan Interest

A quick couple of steps can give you an accurate picture of how much auto loan interest you will pay initially:

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

For example, if your interest rate is five percent, or 0.05, dividing by 12 gives you a value of 0.00416667. Multiplied by $10,000, you will find your interest paid to be $41.67 in the first month.

How to Calculate Interest Paid Until Your Balance is Zero

Suppose you make a $100 payment on your $10,000 car in the first month. As we saw previously, $41.67 of that amount goes to interest at a five percent rate, so $58.33 is applied to your principal. That means the amount you pay interest the following month will go down, and more of your payment will go to paying off the amount you borrowed.

To see that impact each month:

1. Subtract the interest paid in the previous month using the steps outlined from the payment amount.
2. Subtract the result from your original principal to see how much of your loan is left to pay.

You won’t get an exact result every month – money is calculated in dollars and cents, not fractions. But taking these steps every month will give you a very close estimate on calculating your overall interest rate.

Get Help From the Financial Professionals at Cactus Jack's Auto

Financing a car purchase can be overwhelming, so the experts at Cactus Jack's Auto are available to answer any questions from Glendale-area drivers and do the heavy financial lifting. Calculating an interest rate is always easier with a trusted advisor walking you through the steps, so stop in and let’s talk! Basic information on how interest rates affect your payments are available online with our monthly payment calculator. If you have any questions, don’t hesitate to reach out to our finance center.